Application report 2 Essay Example | Topics and Well Written Essays - 500 words

Application report 2 - shew ExampleThe rise in federal interest rate causes general increase in the terms of capital. This leads to the increase in the cost of manufacturing and services. The present range of annuity such as pension provide decrease because the value of dollar or purchasing power of dollar go out fall.However, with the rise in interest cost the high interest rate of 6% provide reduce the present value of annuity to 40,000/1.06= $37,735. The person has lost $360 due to rise in the cost of living. Vice versa is also true. Further, the coming(prenominal) value of the money invested will rise along with the rise in interest cost.The signifi bay windowce of supra calculation is that total annuity though received is $5000 yet actual worth is $4329 only. The worth will further be reduced if interest rate is still high, say, 7 %. The quick calculation can be done with the same equation.Firms calculate weighted average cost of capital that depends upon the cost of ju stice and the cost of debt. The cost of debt will rise with the rise in interest cost as smart set will need to give high interest on its borrowings. The increase in the cost of debt will also increase the cost of equity because the cost of equity rules a few percentage points higher (usually 5 to 10% depending upon the risk profile of the follow) than the debt cost.The higher interest cost will result into higher production cost of the product or services. If the company is unable to pass the increased cost to the consumers whence it will reflect into the reduced earnings of the company for a given year. The net profit of the company is calculated by deducting the interest paid on the debt in a given year besides lesser earnings in a given year may also result into lesser dividend for