QUESTION If the Feds raise interests rates next year what effect would rising ra

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QUESTION  If  the Feds raise interests rates next year what effect would rising rates have upon the folloing: 1.consumer financing for big ticket items such as autos and homes. 2. The present and future values of annuities, 3the NPV calculation, 4.the Wacc.     5. Corporate earnings.  Illustrate your report with relevant financial numbers. hint, cite npv calculation from 1 problem than contrast it against a new calculation performed with a higher interest rate. Cite the numeric effect upon NPV, then explain its rartionale & its significance. This is the kind  "of"numeric illustration"  that you should provide for each of the five topics sections. 2-4 pages single spaced.

BACKGROUND:

(Carter Admin brought long term us treasurey exceeded 15%  t-bills,20%. Reagan's term -interest rates fell as Feds restrictive monetary policy  succeeded in containing inflation. The past 25 yrs, US rates declined: T-bills hovering under 1% and long bond yields 4%. Lately rising prices incited inflation forces. Developing nations have increased consumption of oils, metal, material and food.Thus foriegn and    domestic factors have spurred demand and are contributing to rising prices on a global scale. In addition to this commodity -induced inflation, US consumers are faced with rising costs for essentialservices such as healthcare and education. Fed is faced with a dilemma. Should they increase rates to contain inflation; or should the Fed keep rates very lowto spur the USeconomy which is beset by a collapse in home values,banking crisis, and faltering stock market.)               

Explanation / Answer

1.consumer financing for big ticket items such as autos and homes decreases as home loans and auto loans interest rates raise in economy

2) The present value of annuity decreases as i(1+r) is in denominator. so as r raise (1+r) raises making present value less and future values of annuities increase as FV =x*(1+r) . So if r increase, Future value increase

3)NPV decreases as NPV = -CFo+x/(1+r)+x2/(1+r)^2--- . So as r is in denominator, making r high decreases NPV

4) WACC increases as WACC = w1*-(Ke)+w2*Kd*(1-t) .Due to raise in interest rates,Kd increases maaking WACC higher

5)Corporate earnings get reduced interest must be subracted from EBIT

=EAT = EBIT-interest)*(1-tax rate0

=> due to increase in interest EAT decreases. So corporate earnings decreases

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