1) Original Post = 300 words (Including Part 1 & Part 2)
2) 3- Responses needed = each response should 150 words
3) 3 References
4) Citations with in the body
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
Dividend Discount Model Stock Valuation
How to value a company using discounted cash flow (DCF)
Stock Valuation and Investment Decisions
Video Link: https://youtu.be/3BIIiUyr3-w
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 has 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?
Part 1: Interest Rates
The topic for an interest rate would be macroeconomic. Coming to macroeconomic, where the variables were brought by regular, political occasions that influence the district, countries or geology economy. This elements impacts will have a widespread of the customers, for example, business, and client instead of a person. Thereby this numerous variable in the macroeconomic in a country is concerned with incorporate joblessness rates, budgetary and monetary yields, swelling, land value, securities exchange, cataclysmic events, for example, tremors, floods. From the study directed in the pieces of different social situations, joblessness, stock value, GDP and modern generation are considered to have a critical effect (Montiel, P., & Reinhart, C. M. (1999)).
Total national output: when it comes to a total national outcome we have to comprehend the essentials when the procedure which is impacted by the capital or economic streams. Land costs additionally are based on the significance of the free market activity of the area, Hereby the land costs for the country is generally reliant on the circumstances around the macroeconomics. For instance, the normal cost of room rentals, inns, rent installments increments as financial aspects is affected (El-Sakka, M. I., & McNabb, R. (1999)).
Joblessness Rate: The outcome for this approach will be incorporated with a high business, moderately long and stable costs haul loan costs. Basically, it is determined quarterly though the loan fees and determined month to month to give a superior comprehension of what components impact the high and low-financing costs (El-Sakka, M. I., & McNabb, R. (1999)).
Financial exchange: Having a superior market exchange rate will not be a negative macroeconomic factor. The purchasers burn through cash on the merchandise if the financing costs were low that may cause or builds the better securities exchange for the economy in the nation. There is a solid relationship between’s the loan costs and the stock trade record which improves the current monetary factors in the nation. I m as of now utilized in the assembling business. Assembling is the most significant reason for monetary development. If we look at the previous history, creating nations are very critical and hard to pull in different countries to put resources into their nations which improve financial development. Elements of generation can influence the assembling part. The ongoing exchange war among the top countries will affect my organization at present because of raised exchange prizes to make items (Dewachter, H., & Lyrio, M. (2006)).
Part 2: Stock Valuation, Risk and Returns
Stock Valuation can control the market and will impact the business that was relying upon a few components. The reason for the exchange valuation will acquire a standard execution to pass judgment on the ventures of offer stocks for an association. A contingent of the exchange will be esteemed with the present market cost and the future inherent qualities that will decide whether the stock is under or exaggerated. The stock costs are controlled by financial specialists comprehension of if the organization’s viewpoint anticipated high or low later on business sectors. The organization utilized current had harsh money related measurements over the most recent 5 years, the stock exchange costs were and have been changed relying upon the market offers of the items, nonetheless, the financial specialists are tested by up and coming creation issues, showcase esteems, new purchasers and other high-loan fees. The ongoing key activities to spare employments and decreasing the operational costs helped in the organization keep up monetarily, in any case, later on, an organization needs to concentrate on a few factors, for example, assembling, innovative work, balancing out the money related numbers, loan fees, and others. From an organization’s point of view, the bonds are more secure than stocks yet they do offer a lower degree of profitability. So if the organization’s center is to build their money related benefits, The exchange would be the correct decision. Stocks are the most ideal approach to beat expansion and increment the organization’s growth (Flannery, M. J., & Protopapadakis, A. A. (2002)).
Hazard and Return are conversely corresponding to one another raise the money related terms higher dangers will yield returns that are higher. At the point when an organization puts resources into another endeavor, Risk and Return will be determined and relying upon the hazard levels and the present organization’s financials, the organization would make the venture. Degree of profitability is the best approach to decide whether a nonnegative stock for the association is ideal or risky. The ideas of Risks and Returns were utilized by many organization previously. The acquisitions of an organization have expanded to 30o0 million dollars with a low degree of profitability and caused a money related obligation. As of now, the organization is experiencing a money related emergency and vital plans demonstrate that they are going out on a limb with the money left in the association. Joining the hazard and return insignificant when settling on a money related choice, if there should arise an occurrence of the generation expenses was a key choice ought to be made to lessen other expenses to have less effect on the in general budgetary proportions. It is additionally imperative to keep up the stock cost or increment them with an expansion in the general organization income to build the estimation of the organization (Flannery, M. J., & Protopapadakis, A. A. (2002)).
The interest rate is the profit that is received over time in relation to an amount loaned (Gitman & Zutter, 2012). It is the compensation that a supplier of funds expects and a demander of funds must pay. A variety of factors can influence the equilibrium interest rate. One of them is inflation, a rising trend in the prices of most goods and services. For example, a lender may be lender may be hesitant to lend money for any period of time if the purchasing power of that money will be less when it’s reimbursed, therefore the lender will demand a higher rate which is called inflationary premium. Thus, inflation pushes interest rates higher; deflation causes rates to decline. A second factor influencing interest rates is a risk. Interest rate risk arises from adverse changes in interest rates, causing higher interest costs or lower investment income and therefore lower profits or even losses. At any point when individuals see that a specific speculation is more dangerous, they will expect a higher profit for that venture as remuneration for bearing the hazard. A third factor that can affect the interest rate is a liquidity preference among investors. The term liquidity preference refers to the general tendency of investors to prefer short-term securities (Gitman & Zutter, 2012).
One of the interesting topics of Chapter 7 and 8 was Going Public. When a firm decides to sell its stock in the primary market, there are three possible ways to do them: Either it can be done with a public offering or with right offerings or with a private placement. To go public, it is very important to get approvals from their current shareholders because currently the company is privately owned and issued stocks. After the approvals, the next step is to get all the documents certified to prove the legitimacy of the company and get investment banks to underwrite the offerings. After this, a company gets registered with SEC and the investment community can begin analyzing the company’s prospects. At this point, all the investment bankers and company executives start promoting the company’s stock by road shows, media to attract potential investors from all over the place. And at last after the underwriter sets terms and prices the issue, the SEC must approve the offering and it becomes public (Gitman & Zutter, 2012). Companies decide how they want to go public depending on the level of involvement company wants from the market and how much capital business needs. Recently Spotify went public and they didn’t release additional shares, rather they simply list existing shares directly on the NYSE without getting help or relying on underwriters to help assess demand and set a price ( Disis & Fiegerman, 2018).
The macroeconomic factors that influence the interest rates are:
Inflation has an impact on the interest rates. The lender contract contains a preset amount of money with the fixed rate. When the purchasing power is lesser, the lender may demand higher interest. Therefore, the interest rate is affected by inflation.
GDP of countries
An increase in Gross Domestic Product of a country causes an increase in the interest rates. Similarly, a decrease causes a decrease in interest rates.
The activities and actions of the federal government play a huge role in interest rates. It is due to the fact that a federal government is the major borrower and thus has larger credits and debts. For this reason, it also affects interest rates.
I am currently a part of the Information Technology industry and the factors that affect this industry are
This industry is most sensitive to inflation and effects the spay structures of people in this industry.
The Contemporary Factors facing the industry are globalization and conflicts among nations. Due to globalization the trade and commerce have been conducted which results in foreign currency being entered into the market. The result is a stable economy. This also has an impact on interest rates. The international conflicts become a reason of disturbed trade between nations and therefore the economy is also disturbed.
Stock Valuation is a tool that assists in making decisions regarding trading activities. This informs the traders regarding potential market prices to make decisions and time their purchase or sales of investment.
Stocks and bonds are the stakes of ownership. The stocks are defined as a stake of ownership offered in exchange of cash. While bonds are the debt that the investor gets for the interest rates. Having company finance on bonds rather than stocks is a good option. To understand this, take an example of a corporation’s whose income tax rate is 30%, the bond interest payments of $4,000 will cause a reduction in the income tax payment to $12,00. Now, consider the bond interest rate is 6%, the interest cost after-tax is 4.2%. This proves why bonds are better than stocks.