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FIN 370 CWU Wk 4 TIME Value of MONEY and Compound Interest Discussion & Response

FIN 370 CWU Wk 4 TIME Value of MONEY and Compound Interest Discussion & Response

Question Description

You are required to participate in the discussion with one original posting and at least one response/comment to your peer’s post to get full marks per discussion. Your posts should have no more than 300 words per post.

Pick at least one topic you wish to discuss:

TOPIC 1: TIME value of MONEY and compound interest
Chapter 5 is a technical chapter that introduces important tools for financial managers and investors. Discuss why Albert Einstein (and yes, there is nothing mentioned about him in our book) believed that the most powerful force in the universe was compound interest. Discuss some real life application of this powerful force, and how it might impact the way you think about saving and investing.

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of using a lot of debt?

Please also response to this Peer’s post:
Topic 1- Albert Einstein may have believed that compound interest is the most powerful force in the universe because it increases investments exponentially without assistance. Compound interest adds money to the initial investment and continues to add increasingly larger amounts the longer interest is applied. This is an easy way to make money without any additional effort on the part of the investor. Instead of having to work longer hours or get a job that pays more, compound interest simply lets your money do the work for you by adding interest on interest. All you have to do is invest and wait for your money to increase without having to change the interest rate or deposit amount. Compound interest is essentially creating free money for the investor. When a bank pays compound interest on a savings account for example. If the account holder deposits $100 with an interest rate of 4% added every month then the account would have $104 after the first month. With simple interest, the second month would have $108, but with compound interest, the account would have $108.16. This is only a difference of sixteen cents but after 5 years, the difference between the two types of interest would equal $711.96. The account holder didn’t do anything to the initial amount deposited and after five years it increased from $100 to $1,051.96. This can change the way that people think about saving and investing because they would know that an investment where interest is compounded will be more valuable in the long-run than one that uses simple interest with the same interest rate. This will help them make better savings and investment choices. It will also help to know how much they will really pay in interest when they are the ones paying interest.

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