Week 4 Discussion: Interest Rate, Stock Valuation, Risk and Returns

RESPONSE FOR THE DISCUSSION:

In your response to your classmates, consider comparing cash generation techniques at your company versus his or her company. Draw distinctions based on the industry and tell your colleagues why those distinctions are necessary for the management of cash flow. Below are additional suggestions on how to respond to your classmates’ discussions:

· Ask a probing question, substantiated with additional background information, evidence or research.

· Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives.

· Offer and support an alternative perspective using readings from the classroom or from your own research.

· Validate an idea with your own experience and additional research.

· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

· Expand on your colleagues’ postings by providing additional insights or contrasting perspectives based on readings and evidence.

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Author: Uday Chandra Maya Vanjri 

Part 1: Interest Rates

The first macroeconomic factor that influences the interest rates is inflation. In order to control the high inflation that is recognized in the economy, the interest rates are also increased by the government and the financial institutions. When the interest rates are increased, there are fewer people who would engage in borrowing of funds from the financial institutions and thus the amount of money in circulation is largely reduced. So, when there is inflation in the economy, the interest rates are also noted to increase (Janda and Zetek, 2013).

The Fed’s monetary policy is another important influencer of interest rate. When the federal reserve or the federal government expands the monetary policy, this may decrease the interest rates from the short-term perspective but it leads to higher interest rates in the long run. The expansion of the monetary policies or decrease in the interest rates can lead to inflation and increase the overall growth and development of the economy. This often leads to higher interest rates later (Janda and Zetek, 2013).

The impact of macroeconomic factors in the information and communication industry is very high. When the interest rates for borrowing is increased, it leads to higher amount of money that the company has to spend to take external investments from the economy to keep the place working. Every business needs investment and with the rise in interest rates or inflation, it becomes difficult to borrow money and thus it becomes all the most difficult for a business to survive. With inflation, the ICT industry faces a rise in the cost of each labourer and the cost of production per unit which further leads to a negative impact on the business as a whole (Sasvari, 2011).

According to the research conducted, the two contemporary factors that are likely to have an impact on the ICT industry include the costs of the hardware, software or applications and the buying capacity of the customers. When the hardware or software purchase is expected to cost a high amount of money, then the company might have to engage in borrowing at the current interest rates. The buying capacity of the potential customers depends on the inflation in the market and the interest rates charged on the credit card purchases (Goyal, Purohit and Bhagat, 2010).

Part 2: Stock Evaluation, Risk and Returns

Stock evaluation is the process by which the intrinsic value of a particular company is determined. Intrinsic valuation of the business entails the inherent value that the company makes of its own business or of the stock. The method of P/E ratio is adopted to calculate it. The company that I worked in earlier was not large enough to have the stock evaluation but investments in other businesses are made based on the valuation of the business and the likelihood of its growth in the future. Based on the learnings acquired, it is believed that debt financing through issuing corporate bonds would prove to be much more beneficial when compared to share financing that is done by giving ownership rights to the company to the investors that buy the stocks in the company (Ranosz, 2017).

Based on the materials presented and the learning ac            quired, it was understood that the materials are important in financial decision making because they shed light on the raw materials and other possessions that the company has. The evaluation of assets is important to make sure that the returns would be achieved or compensation for the investment made would be acquired in case a business goes bankrupt. The risks are taken based on the potential returns that the company would give in the short run and the long run both. If a company does not have many assets and is unable to commit for the compensation of the financial investment then the financial decision to not invest would prove to be much more beneficial.

 

References:

Goyal, E., Purohit, S. and Bhagat, M. (2010). Factors that Affect Information and Communication Technology Usage: A Case Study in Management Education. Journal of Information Technology Management, 21(4).

Janda, K. and Zetek, P. (2013). Macroeconomic Factors Influencing Interest Rates of Microfinance Institutions in Latin America. Munich Personal RePEc Archive.

Ranosz, R. (2017). Analysis of Bonds as an Instrument for Financing Mining Investments. Arch. Min. Sci., 62(2).

Sasvari, P. (2011). The Macroeconomic Effect of the Information and Communication Technology in Hungary. International Journal of Advanced Computer Science and Applications, 2(12).