Investment Essay Example | Topics and Well Written Essays - 250 words

Investment - Essay Example Investment A). The discount rate is the interest rate that is used in the determination of the present value of all the future cash flows. It can be taken as the interest rates that the banks obtain for their lending from the federal bank or the rate at which banks charge other banks for overnight borrowings. The discount rate is determined by several factors. First is the general economic conditions i.e. the discount rate will increase during periods in which the inflation rates are high or when the foreign exchange rates are volatile (Bierman & Smidt, 2004). The second factor that influences this rate is the marketability of a firm’s security. Firms whose securities are on high demand will experience a decline in their discount rates. b) Product 1 rate of return The total dividend in a year= 1.5*4=6 Year 1 rate of return= 1+discount/nominal price*100 =1+6/100*100%=7% Year 2-4 rater of return= 6/100*100%=6% Year 5 rate of return= 6+6.4/100*100%=12.4% Average rate of return= ((7+6+6+6+12.4)%)/(5 Years) =7.48% Product 2 rate of return= nominal interest rate =6% Product 3 rate of return Year 1 rate of return=(7-2(premium))/100*100%= 5% Rear 2 and 3 return= nominal rate = 7% Product rate of return= ((5+7+7))/3=6.33% Product 1 looks more attractive because it has the highest rate of return compared to product 2 and 3.