Finance Peer Responses/Reflection #7

· Choose and Respond to 3 posts listed below. Advance the conversation; provide a real-world application and experiential examples;

· Conceptually discuss your key [most significant] learning insight or take-away from the selected forum topic comments.

· Responses should be a minimum of 150-250 words , supported by at least one reference outside of the textbook (use academic journals), either supporting or refuting the position of the author of the forum topic response or peer response.

Topic #1  Financial Hardship and Bankruptcy

For this week’s forum we will discuss financial hardship and bankruptcies.  This is a topic that in the recent decade has resonated the most with the financial markets.  The effects of bankruptcies are not limited to financial markets and often involves political movements as well.  After the September of 2001, many markets, especially the airlines saw an increase in the Chapter 11 filings.  Further, after the housing market collapse of 2008, many American families were also forced into bankruptcy which, followed by the market collapse.  Especially in the globalized markets of today, the effects of large corporate bankruptcies have much more global effect.  The effects of financial hardship is not always limited to corporates and seldom affects governments the same.  One can argue that today’s governments are often run like a corporate.  United States has witnessed a shift in political debates over debt and spending, especially after the ten years of war.  Recently Greece has been in the spotlight over its newly elected government, as a result of its debt crisis and budget cuts.  

In the corporate finance, corporates often used debt as a leverage as discussed in previous weeks.  However, one factor that limits the amount of debt a corporate can use comes in the form of “bankruptcy costs” (Ross, 2000, p. 524).  As the debt-equity ratios rise, the probability of the firms inability to repay its bondholders rises as well.  In such situation, the firm’s ownership of its assets are transferred from the shareholder to the bondholders.  It can be said that when a firm becomes bankrupt, the value of its assets equal that of its debt.  In this situation, the value of equity is said to be zero and the shareholders turnover the ownership to the bondholders in a legal process (Ross, 2000, p. 525).  There are many costs associated with the firms bankruptcy and are often categorized as direct and indirect costs.  The direct costs are often related to the legal and financial proceedings associated with the move.  The indirect costs are those associated with avoiding the bankruptcy by the financially distressed company.  The indirect costs can be more complicated to measure at times.  For example when a manufacturing company is expected file for bankruptcy, there will be a loss of confidence in their already manufactured products.  In such situations, the consumers more likely will not purchase those products in anticipation of warranty disputes.

Financial distress can be defined in four general categories which are: business failure, legal bankruptcy, technical insolvency and accounting insolvency.  When a firm cannot meet its required payments to its creditors, it has two basic options, liquidation or reorganization.  This is were the more known phrases of bankruptcy come into play.  The “bankruptcy liquidation” falls under the Chapter 7 of the U.S. Federal Bankruptcy Reform Act of 1987.  This process is better known as Chapter 7 Bankruptcy.  The “bankruptcy reorganization” falls under the Chapter 11 of the Federal Bankruptcy Reform Act of 1987, or better known as Chapter 11 bankruptcy.  In the Chapter 7 bankruptcy, the firm’s assets are frozen, a bankruptcy trustee is elected by the creditors which will attempt to liquidate the assets of the firm.  After liquidation, the funds are paid in the following priority list in accordance to the “absolute priority rule (APR):

1- Administration costs and expenses for the bankruptcy

2- Wages, salaries and the commissions.

3- Contributions to the employee benefit plans.

4- Consumer claims

5- Government taxes

6- Creditors payments

7- Preferred shareholder payments

8- Common shareholder payments

Chapter 11 bankruptcy aims to restructure the corporation with provisions to repay the creditors.  After filing the bankruptcy with the court, once it is approved by a judge, the firm continues to run the business and in the meantime it submits a restructuring plan.  The shareholders and the creditors are broken into classes.  Once the classes accept the plan, it must be confirmed by the courts again.  Under the plan, the terms of repayment may have been modified or previous creditors have sold their assets to new creditors and such.  For some length of time, the corporation will continue to operate under the provisions approved by the restructuring plan until the firm exits the bankruptcy.  

A great example of chapter 11 bankruptcy is the American Airline story.  Since 2001 a record number of large American airlines filed for chapter 11.  Amongst them were US Airways [twice], United Airlines, Frontier Airlines, Delta Airlines and American Airlines in 2012.  One major element in almost every airline bankruptcy is the rejection by the debtor of its current collective bargaining agreements with employees (Cudahy, 2006). After satisfying certain requirements, bankruptcy law permits courts to approve rejection of labor contracts by the debtor-employer. With this tool, airline managers reduce costs. Terms of an employee contract negotiated over years can be eliminated in months through Chapter 11 (Wikipedia, n.d.).  Until 2006, American Airlines was the world’s largest carrier, but many mergers in the American airline industry pushed it to the third after United Continental and Delta airlines.  As a result of the bankruptcy proceedings, the shares of AA collapsed to nearly $0.30 a share as a result (Isidore, 2011).  In November of 2013, a judge allowed the $11 billion merger between the US Airways and the American Airlines creating once again the world’s largest airline and such causing the AA to exit bankruptcy (Reuters, 2013).  

Since this topic was regarding bankruptcies, I felt to include that despite the popular belief that student loans are never wiped by the bankruptcies, it is possible to do so if the individual passes the Brunner test.  Current bankruptcy law exempts education loans and obligations from eligibility for discharge unless doing so would cause the consumer undue hardship. The problem is that undue hardship is not defined within bankruptcy law, leaving the bankruptcy courts to decide what this means (Mayotte, 2014). References: Airline bankruptcies in the United States. (n.d.). Retrieved February 15, 2015, from http://en.wikipedia.org/wiki/Airline_bankruptcies_in_the_United_States Cudahy, R. D. (2006). Airlines: Destined to Fail, The Journal of Air Lines & Communication, 71, 3. Isidore, C., & Ellis, B. (2011, November 29). American Airlines and AMR file for Chapter 11 bankruptcy. Retrieved February 15, 2015, from http://money.cnn.com/2011/11/29/news/companies/american_airlines_bankruptcy/ Mayotte, B. (2014, August 14). Debunking the Student Loan Bankruptcy Myth. Retrieved February 15, 2015, from http://www.usnews.com/education/blogs/student-loan-ranger/2014/08/13/debunking-the-student-loan-bankruptcy-myth Reuters. (2013, November 10). American Airlines, US Airways Merger Approved By Bankruptcy Judge. Retrieved February 15, 2015, from http://www.huffingtonpost.com/2013/11/27/american-airlines-merger_n_4350026.html Ross, S., & Westerfield, R. (2000). Financial Leverage and Capital Structure Policy. In Fundamentals of Corporate Finance (9th ed.). Boston: Irwin/McGraw-Hill.

Topic #2: Financial Distress

 

John, 1993 defines financial distress as a “mismatch between the current available liquid assets of a firm and its current obligations due to financial contracts.” Most firms deal with financial distress by either restructuring the company assets or restructuring the company contracts. Sometimes both are needed in order to save a company from financial distress. This is often a long and resource heavy process in order to hopefully save a company. When looking for examples of financial distress one often does not have to look far as America has recently been in financial distress, such as have many of the top corporate giants that range from the banking industry to the airline industry. The problem with financial distress though is that the costs are often higher than just the impact of the initial financial distress event. When this happens on a small corporate level the results are often harmful to that local economy but when the problem becomes financial distress of a country the results become even more serious.  When looking at financial distress there are three primary cost that tend to overshadow some of the lesser cost of financial distress to the company.

            The first that John, 1993 described was the fact that bankruptcy cost typically does come with financial distress. They are often the highest cost that acquired in the process. These fees can often even occur when the company does not need to entirely file for bankruptcy. Many of these fees come from auditor’s fees, attorney fees, payments, and management fees. These fees can often even make the financial distress of the company even worse. They are necessary though for a company to be able to determine the correct path and if it is bankruptcy or just restructuring without filing. When it is a country that is looking into going bankrupt there are even further fees associated as you start looking at aspects of government shut down which can be even twice as costly.

            The next cost is often the fact that companies in financial distress often need attention of management switched to finance away from operations. Even though this does not seem important often when management attention is taken away from making sure that the business operations continue to run smoothly production starts to fall. When production starts to fall so does revenue to an already struggling company. To add to this many times new management has to be brought in, in order to save the company that may be more expensive or cost additional fees to the company. On a larger scale such as with a country this is even harder to come by. It is simple for a company to fire a manager or suggest a change in management style. A country on the other hand needs government change which is often a tough and lengthy process in order to change management styles.

            The final major cost is indirect and is the higher cost of capital to the company. If a bank notices that a company is in financial distress then they often raise interest rates. This is due to the company being a higher risk. Banks want to make sure they can see a return on the money they are lending out if they are going to take place in overall risky investments. Again this can be taken to the national level and is often a problem seen with America now. Other countries will still offer to loan us money and assets but now they often come at a much higher price than they did before America was seen as a country that is in financial distress.

            Outside of the cost one of the most important aspects for a company to understand is the indicators of financial distress. This is something that Sheikhi, 2012 addressed in his paper. Sheikhi, 2012 listed 7 primary signs of financial distress which are, the continued erosion of margins which suggest the inability to remain solvent, expansion beyond the financial means of the business, over-reliance on borrowed funds so that a significant portion is going to loan serving, an inadequate capital base, an apparent lack of cash flow forecasting or absence of a cash budget all together, a difficult time paying creditors and finally continual need for capital loans injection into the company. Sheikhi, 2012 further goes on to make the point that a financial distress score is a good indicator of how a company is performing. The financial distress score is obtained using the Altman Z-score, which takes a linear combination of four to five business ratios and then weights them by coefficients. In Sheikhi’s research she found that companies that had a clear indication of their financial distress score were less likely to fall into total bankruptcy and also were able to make better merger decisions based on the financial distress score of the company they were looking at merging with.

            In conclusion financial distress can have many implications. On a large scale such as a country that is under financial distress it can lead to high unemployment, reduction in Gross Domestic Product, and reduction in the quality of life for citizens. In everyday business practice it can have an effect on banks, shareholders employees, customers and distributors of goods.  This proves the importance of accurately using a financial distress score. When it can be predicted early on that a company is headed for financial distress they can readjust management style and how capital is being used. This foresight can often be what saves a company.

 

References:

 

John, T. A. (1993). Accounting measures of corporate liquidity, leverage, and costs of financial distress. Financial Management, 22(3), 91. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/208174897?accountid=40195

 

Sheikhi, M., Shams, M. F., & Sheikhi, Z. (2012). Financial distress prediction using distress score as a predictor. International Journal of Business and Management, 7(1), 169-181. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/916730402?accountid=40195

Topic #3: Political Risk

                        When companies have businesses within a country, they have risk involved that stems from politics.  Political risk can result from changes in economic and social policies, or political problems in a country where a company conducts business (Political Risk, n.d.).  These risks can affect the value of a company because they affect the company’s operations. Political risks are not limited to international companies, and can happen within the host country of the company. 

            Economic risks for a company can result from a country raising taxes on an industry or product, raising wages, or changes in currency valuation (Magloff, n.d.).  These changes affect a business by reducing profits to a company.  For instance, political risk to companies currently exists within the United States when it pertains to increasing the minimum wage.  Another example was in 2000, Zimbabwe had high inflation, causing a telecommunications company to enter the market of other nations in Africa because of the economic risk (Magloff, n.d.). 

            Another political risk stems from social policy changes.  As governments enact new regulations on business, costs increase (Braun, 2012).  A current example of social policy changes is the regulations on environmental factors that increase costs to a company.  A World Bank survey had 50 percent of the respondents stating that regulations were one of their biggest concerns when it comes to political risk (Braun,n.d.).  Regulations on businesses can change with the election of new leaders, and can pose great risk to some businesses.  Another example of a social policy would be within the United States, and the “war on obesity”, which has affected fast food companies and makers of sugary drinks. 

            Political problems within a county also pose political risk.  Some of these problems could happen rather quickly, such as the revolutions called the “Arab Spring” that occurred rapidly in North Africa and the Middle East in 2011 (Culp, 2012).  Revolutions and coups can happen without much notice and can greatly affect a company that is conducting business within one of these countries.  Additionally, a government of a country can decide to take over a business, as happened in Cuba when American companies were taken over by the Cuban government (Magloff, n.d.).  Additionally, in 2007 the Venezuelan government took over the local phone company, causing huge losses to investors (Christy, n.d.).  Another political risk takes the form of physical risk to the employees of a company, which can result in the need for security to protect the workers (Magloff, n.d.).

            A final political risk can result from military conflicts.  Recently we saw military conflict arise between Russia and Ukraine.  This military conflict has resulted in increases in prices to commodities (Roy, 2014.).  We have also seen sanctions placed on Iran by countries because of their development of nuclear technology, and of course we see military conflict against Islamic State. Military conflicts or threats of military conflict can result in economic issues for a company as prices may change, or they may no longer be able to conduct business in certain areas of the world.   

            Companies need to assess political risk when conducting business.  This is done by identifying potential risk, measuring the risk, and managing the risk (Culp, 2012).  These three stages should be part of any companies risk assessment.  First, a company needs to identify risks based on locations (Culp, 2012).  Each country has different political risk involved for a company.  For instance, a United States company would not need to worry about risk of military conflict between the United States and Canada.  However, they do need to analyze the economic conditions and government leadership in order to identify any potential risk. 

            The second step is to measure the risk to determine the effects on the business (Culp, 2012).  Once the risk has been identified, companies need to thoroughly analyze each individual risk and quantify that risk.  Different scenarios can have different affects on the profitability of a company.  For instance, a large change in the value of a currency can have a significant impact on profitability, and companies need to be prepared to address those changes in values should they occur.

            The third step is to manage the risk by taking steps to minimize the financial impact of the risk (Culp, 2012).  Once a risk scenario is deemed to be current risk to a company, they need to act quickly by implementing their risk management plan.   As previously mentioned, when Zimbabwe was experiencing rapid inflation a telecommunications company implemented their risk management plan and began conduction operations in other African nations.  Currently, companies operating in Russia that have risk associated with the Ukraine conflict need to be taking steps to ensure that their risk is minimized by possibly moving operations.

            Political risk is adherent in any business and companies need to be aware of all political risks.  These risks arise from the change in a countries political leadership, changes in a countries economic condition, changes in regulatory or taxation policies, and political or military conflicts between nations.  It is important for companies to understand the potential political risks involved in conducting business.  First, they need to identify potential risk, then they need measure that risk by quantifying it, and finally, they need to have plans in place on how they will manage that risk.  Once a potential risk becomes a current risk, companies need to act quickly to minimize any financial impact on the firm. 

 

            

  

 

References

Braun, K. (2012, May 30). The Political Risks of Doing Business Overseas. Retrieved February 18,            2015, from http://www.rmmagazine.com/2012/05/30/the-political-risks-of-doing-      business-overseas/

Christy, J. (n.d.). Understanding and Managing Political Risk. Retrieved February 18, 2015, from             http://internationalinvest.about.com/od/globalmarkets101/a/countryresearch.htm

Culp, S. (2012, April 27). Political Risk Can't Be Avoided, But It Can Be Managed. Retrieved         February 18, 2015, from http://www.forbes.com/sites/steveculp/2012/08/27/political-           risk-cant-be-avoided-but-it-can-be-managed/

Magloff, L. (n.d.). Examples of Companies Managing Political Risk. Retrieved February 18, 2015,            from http://smallbusiness.chron.com/examples-companies-managing-political-risk-     18262.html

Political Risk. (n.d.). Retrieved February 18, 2015, from       http://www.investinganswers.com/financial-dictionary/stock-market/political-risk-636

Roy, S. (2014, March 3). Hard Assets Investor Commodities, gold, oil & gas Profile| Send             Message| Follow (4,158 followers) Russia-Ukraine Conflict Impacts Commodities Across      The Board. Retrieved February 18, 2015, from    http://seekingalpha.com/article/2064353-russia-ukraine-conflict-impacts-commodities-  across-the-board

Topic 4: Bankruptcy- Liquidation and Reorganization

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          As we have previously discussed throughout the course, there are several ways by which individuals within a company can contribute and ensuring that the company will continue to grow and prosper. With that being said, not every company successful one, mistakes are made and sometimes unfortunately companies are unable to pay their debts back. This can be a very emotionally straining part of a company's timeline, and sometimes the debt they carry is simply too great to repay and constantly gaining interest. For companies that are in this situation, and are currently unable to pay their debts off, one option they have is to file for formal bankruptcy. This is an option which is you simply as a last resort, however there are instances where these companies will have no other choice and bankruptcy must be filed. The main reasons they will undergo bankruptcy are to either eliminate current debt or try to reach an agreement where the debt and the premises by which it must be repaid can be reworked. In fact, one of the ways we can monitor businesses that may potentially go bankrupt is by examining their debt equity ratio. Naturally, this number becomes increasingly higher, it will become less likely that the company will be able to repay their debts.

 

           Now that it has been established with bankruptcy is, and how it may be used by businesses, we can now examine the different types of bankruptcy. Two very popular forms of bankruptcy are chapter 7 and chapters 13 bankruptcy. The first of which, chapter 7 is referred to as liquidation. In a liquidation or chapter 7 form of bankruptcy, all of the assets that a company or an individual all are able to be sold by the individual or entity that is owed a debt. The money recuperated from the sale of these assets is then used to pay back a portion of the owed money. Chapter 7 serves as an option for both companies and individuals, however the end game usually is different and each of these cases. For individuals who are filing for Chapter 7 bankruptcy, the goal of the entire process is to exhaust all of the individual's current debt and give them a fresh start financially. Many times when this occurs, the liquidation of an individual's assets commonly fails to repay a good fraction of the money owed, however was the assets are liquidated, the individual is given a new lease on their financial life. If a business files for Chapter 7 bankruptcy, this can be a much more damaging process and a sense that once all of the assets of the company are liquidated, the company is unable to continue performing business, and is dissolved. At this point the company will cease to exist, so Chapter 7 can be viewed as a death knell in this sense. Companies that have a large value of assets such as CoinTerra, a theater company for BitCoin can choose this option, as their assets can be liquidated and the money earned from this process can be used to repay their debts. (Higgins, 2015) another company that has recently chosen to file for bankruptcy protection is RadioShack, as the buyer company Sprint will soon learn the rights to 2400 of their stores. (Ruiz, 2015)

 

          Another option that financially insolvent individuals have is to file for Chapter 13 bankruptcy. This type of bankruptcy is termed reorganization, and the process is slightly different than what takes place during the liquidation process. As opposed to the process of liquidating assets and keeping the beginning value, chapter 13 bankruptcy is termed reorganization because it seeks to reorganize an individual's financial situation with the hopes of making it more possible for them to repay their current debts. During this process, the debtors and creditors will come together and negotiate a repayment plan which both parties seem to be fair. During this process, the timeline is often changed by which the debts must be repaid in order to make it more possible for the individual to repay all the debt. One of the advantages to this type of bankruptcy over the chapter 7 type is that the debtor does not have to liquidate any of their current assets, which in the individual's case may be very important things such as a house or car. In Chapter 13, the individual is able to keep these assets, and upon completion of a more negotiated plan, hopefully will be able to eventually repay their debts as well. At surface it seems that chapter 13 is a much better option for individuals who are going bankrupt, however this option is constituent on one key factor: the individual filing for Chapter 13 must be deemed to have the ability to pay the debts at the negotiated rate. For individuals who cannot afford to pay back their debts even by the negotiated rate, chapter 7 is most likely their only option.

 

          For businesses, there is another form of reorganization bankruptcy, which is termed Chapter 11. This is strictly for corporations which are unable to repay their debts over a given time. Many corporations will seek this option are able to do so over the Chapter seven option. This is because creditors view the particular company as still being a successful business potentially, and anytime they view an institution as a moneymaking entity, they feel that the ability to capitalize off of these particular gains will benefit them in the long run in regard to getting the debts paid rather than making the company close for good. During the Chapter 11 process, this is viewed as a more practical option, however in order to undergo this form of bankruptcy the company must lay out a well-developed plan including a timeline by which they will repay all of the previously borrowed funds. This option is much more appealing to these companies because they are able to continue to conduct their business instead of closing under the chapter 7 reform. This method may not be preferred by creditors however, as goods and services they are not reimbursed for will continue to be unpaid for a particular amount of time. This particular form of bankruptcy has recently been used by corporations such as SaladWorks LLC, a corporation who is actively seeking a buyer in order to help them deal with current litigation issues they are facing. Because they are still viewed as a lucrative, this option is viewed as the best for them as they will ultimately be able to hopefully pay their debts and continue operating as a business once the bankruptcy title has been lifted. (Brickley, 2015)

 

Brickley, Peg. 2015. Saladworks Files for Chapter 11 Bankruptcy Protection. http://www.wsj.com/articles/saladworks-files-for-chapter-11-bankruptcy-protection-1424189190

 

Higgins, Stan. 2015. BitCoing Mining Firm CoinTerra Files for Chapter 7 Bankruptcy. http://www.coindesk.com/bitcoin-mining-firm-cointerra-files-chapter-7-bankruptcy/

 

Ruiz, Rebecca. 2015. RadioShack Files for Chapter 11 Bankruptcy. http://dealbook.nytimes.com/2015/02/05/radio-shack-files-for-chapter-11-bankrutpcy/?_r=0 After a Deal with Sprint.

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Topic 5: Purchasing Power Parity

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Purchasing power parity is an economic theory that has an interesting historical basis. Scholars as far back as the sixteenth century who were interested in international commercial trade proposed a quantity theory of money that assigned a value of money adjusted for exchange differences in response to radical changes in economic conditions when prices of gold and silver changed from fixed rates to varying rates (Sosvilla, 2004). These varying rates caused controversy over the decreasing value of domestic money and therefore purchasing power parity theories were formed. This idea was then reignited during the first world war when extreme inflation and disorganized exchange rates were rampant between hostile, antagonistic countries (Sosvilla, 2004). Economists were concerned that certain countries would purposely devalue their currencies in order to gain some revenue advantage (Rogoff, 1996). Therefore, after the war, there had to be a reasonable method for resetting country exchange rates to the extent that they did not drastically alter prices of goods or the individual country’s finances (Rogoff, 1996). Purchasing power parity theory was revived and its methods utilized in order to restore European rates with the US dollar rates. 

Today, Purchasing power parity theory is used in several ways from determining an appropriate exchange rate for “a newly independent country, forecasting current and long-term exchange rates,” and adjusting for price differences in income between countries (Rogoff, 1996). The core of this theory is the idea that products or goods sold should cost approximately the same in one country as they do in another when you take into account the exchange rate (Chee-Keong Choong, 2006). Factoring the exchange rate between countries to the extent that the “exchange” is comparable to each countries’ purchasing power. The basic formula for purchasing power parity is as follows:

S = P1 / P2 

S = exchange rate of currency (domestic currency value per unit of foreign currency)

P1 represents the cost of good x in currency 1 (the domestic price level in domestic currency)

P2 represents the cost of good x in currency 2 (the foreign price level in foreign currency) (Hyrina, 2010)

This adjustment in prices to relatable rates is sometimes referred to as the “Law of one price” (Isard, 1977). Again, it essentially means that goods should sell for comparable prices in different countries once exchange rates are factored in. However, this theory has many challenges affecting it’s efficiency.

One being that price disparities between countries are not sustainable in the long run as market behaviors will equalize prices between countries. A particular behavior that affects this is when the costs of goods are significantly cheaper in other countries. Eventually, the cost to travel/ship from other countries becomes feasible since the savings is so great to buy out of the country. This causes the cost of goods to rise in the other country and the costs of goods domestically to drop - which brings the price of goods between countries closer in cost - or theoretically so. Additionally, if a company buys large volumes of goods from foreign markets at a much lower cost, instead of buying at home at a much greater price, and ships them home for sale, this should eventually result in prices in both countries becoming more comparable. In this case the profits gained from buying cheap and selling where prices are high is not sustainable. This causes a major discrepancies in the value of exchange rates and would need to be corrected. These extreme profits would be short lived necessitating correction of exchange rates to reflect the purchasing power of the country. 

Another being that the theory does not always factor in the widely varying costs that are associated with bringing goods to consumers in the different countries. This includes taxes, tariffs, laws affecting the sale of products, transportation costs, assembly, labor, overhead costs, and any factors that affect the process of acquiring, handling and selling a product more expensive. These all affect the final price of items and these additional factors vary greatly in different countries. Profit margins and taxes differ from country to country as well. Therefore, for some highly traded items this idea works well, like for gold and other precious metals. The biggest challenge in implementing this method is that data and price indexes across countries are not similar and deviations in prices vary between years (Rogoff, 1996). 

Because there are so many additional factors that limit the validity of the basic purchasing power parity calculation; further calculations have been created to allow for “less restrictive relationships between prices and exchange rates” (Sosvilla, 2004). There are calculations that also take into account inflation and whether one inflation rate exceeds the rates of other country’s rates - in that case a domestic currency depreciation would be used in the calculations to adjust for this (Sosvilla, 2004). Therefore, the theory of purchasing power parity has required additional formulas and revisions of the basic concept to account for important factors that affect differences in currency. The original formula is not obsolete for some goods, but requires additional calculations in order to be useful since laws and trade practices have become exponentially more complex from when the theory was originally created. The deviations in purchasing power parity are so complex that economists are still revisiting how to better assimilate foreign goods markets.  

References:

Sosvilla Rivero, S. J., & Garcia, E. (2004). Purchasing power parity revisited. Rochester: Social Science Research Network. doi:http://dx.doi.org/10.2139/ssrn.477446

Chee-Keong Choong, Wai-Ching Poon, Muzafar, S. H., & Yusop, Z. (2006). The validity of purchasing power parity (PPP) theory in asean-five economies: The bounds test approach. International Journal of Business and Society, 7(1), 1-16. Retrieved from http://search.proquest.com.proxy.davenport.edu/docview/275111910?accountid=40195

Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic literature, 647-668.

Hyrina, Y., & Serletis, A. (2010). Purchasing power parity over a century. Journal of Economic Studies, 37(1), 117-144. doi:http://dx.doi.org/10.1108/01443581011012289

Isard, P. (1977). How far can we push the" law of one price"?. The American Economic Review, 942-948.

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