Introduction to Finance

Figure 18.4
, we see a similar 
story: ExxonMobil’s stock price is volatile and is constantly changing.
As we learned in Chapter 12’s discussion of effi
cient markets, some variability is expec-
ted as news (about the global or national economy, a fi rm’s industry, and a specifi c fi rm) will 
be quickly refl ected in stock prices. Over the period shown in Figure 18.4, ExxonMobil’s 
stock price ranged from about $56 (mid-2010) to $104 (mid-2014). The high price prior to 
the recession was about $95 at the end of 2007. Its price fell to about $62 by October 2008, 
just ten months later, as the Great Recession began. Of course, the recession during that time 
had much to do with the decline of ExxonMobil’s stock price. Rising oil prices and sluggish 
economic growth helped ExxonMobil’s stock price to recover from its mid-2010 low—but 
then falling global oil prices starting in mid-2014 led to stock price declines. 
What should a fi nancial manager to do? The answer is to focus on the longer-term, not 
on day-to-day market fl uctuations.
9
Business cycles and fi nancial market cycles come and go, 
and cost of capital calculations should account for these variations over time, but not with 
daily revisions.
Rather than focus on the current day’s interest rate or stock price, a longer-term per-
spective is needed. This is appropriate, as the capital investment under consideration is likely 
long-term as well. Today’s costs matter most only if the fi rm needs to raise capital by getting 
bank loans, issuing bonds, or issuing shares of stock. If internal funds (accumulated cash and 
retained earnings) can be used, the fi rm can use a longer-term average cost of capital that 
should better refl ect the fi rm’s history and prospects rather than current conditions. Some 
subjective adjustments may be appropriate because of risk perceptions in the fi nancial markets 
(much like the cost of capital adjustments of project risk in Chapter 17). The fi rm will have 
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Baa Corporate Bond
Yield
Aaa Corporate Bond
Yield