Interest Rate, Stock Valuation, Risk and Returns

Part 1: Interest Rates

Many managers do not understand the various ways that interest rates can affect business decisions. For example, if your company decided to build a plant with a 30-year life and short-term debt financing (renewed annually), the cost of the plant could skyrocket if interest rates were to return to their previous highs of 12% to 14%. On the other hand, locking into high, long-term rates could be very costly also with a long period when low short-term interest rates were to be available. As you can see, the ability to know your economic environment and its impact on projected interest rates can be crucial to making good financing decisions.

Describe two to three macroeconomic factors that influence interest rates in general. Explain the effects of each factor on interest rates.

Now think about the industry in which you are employed or one in which you have past experience. To what macroeconomic factors is your industry most sensitive?

Describe two contemporary factors that seem to be impacting your industry today, and identify their impacts on the interest rates experienced within your chosen industry.

Support your comments with your own experiences, the weekly resources, and/or additional research. Use APA throughout and provide appropriate in-text citations and references.

Part 2: Stock Valuation, Risk and Returns

Stock valuation

Dividend Discount Model Stock Valuation

How to value a company using discounted cash flow (DCF)

Stock Valuation and Investment Decisions

The links above contain information on stock valuation, risk and returns. Please review each one of them. Based on the knowledge gained from the materials presented in the links above, complete the following activities:

Present a detailed discussion of what you learned about stock valuation. Provide examples of how your company have used the concepts. Do you believe financing a company’s operation using stock is better than financing with bonds? Why or why not? Support your discussion with a numerical example.

Based on the materials presented in the “Risk and Return” video, present a discussion on why the materials are important in financial decision making. How would you incorporate risk and return in your financing decisions?

Requirements:

Mininum 2 references for each part, APA format, each part should have min 250 words.

https://www.youtube.com/watch?v=DSn1HThfb5w&authuser=0

Solution Preview

Part 1
Qn 1
Supply and demand: an interest can be described as the price for borrowing money. This means that when the demand for borrowing money increases the interest rates will also go up. The same scenario will be experienced if the supply for money from the lenders decreases. The decrease in supply for money from the lenders is often caused by huge withdrawal of money from savings account hence reducing the available amount of money for banks to lend.

(820 words)