NPV
This becomes more complicated when trying to determine the changes that would occur to the net present value of today's dollars, especially given the uncertainties involved with changes in the interest rate. On the one hand, the value of future dollars (i.e. today's dollars saved) is eroded by inflation, so a lower interest rate is detrimental to NPV; on the other hand, higher interest rates mean more lucrative lending and higher returns on many investment, which would mean a dollar invested today would be worth more in the future (Investopedia 2011). At the same time, higher interest rates could slow the pace of business and damage gains in the stock market, leading to diminished returns (Magnuson 2008). The effect of interest rates on the NPV, then, depends on other macroeconomic and financial effects.
WACC
The Weighted Average Cost of Capital would basically increase due to a change in interest rates, but more important are the effects that a change in interest rates would have on the various components of the weighted average cost of capital. As borrowing becomes more expensive, a lower debt to equity ratio would become more beneficial to many companies, and less borrowing (or slower growth) would be the necessary result (Investopedia 2011). This could boost investment opportunities for many individuals, but that would mean less money would be available for purchasing goods, which has a depressive effect on the economy…. Again, it is difficult to predict what will happen in such unstable times.
Corporate Earnings
The effect of a higher interest rate on corporate earnings is something that is simpler to determine and easier to predict. As was stated above, a higher cost of borrowing is likely to...
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