Time value of money for Starbucks Essay Example | Topics and Well Written Essays - 500 words

Time value of coin for Starbucks - Essay ExampleThere is some uncertainty as it relates to the repayment date. The interest rate could be higher and lower than it is currently. I would also take into consideration the risk involved in purchase the bond as well as the opportunity cost involved. Starbucks is currently in financial impediment and so there is a possibility that I may not receive the payment in a years time but at a later date. I would thereof require an interest rate which is higher than normal because of the additional risk involved with buying bonds in Starbucks instead of another bond or in an alternative investment. To account for the additional risk I would actually add a risk premium which would account for the uncertainty involved in investment in Starbucks. Discount Rate for Starbuck Bonds According to Brigham and Ehrhardt (2005) finding present values is known as send packinging. The discount rate that would be used to calculate the amount to be paid woul d be dependent on the going interest rate on similar bonds. For example, if the current going interest rate is 8% and I expect it to increase to 9% in a year time then I would require a return of 9% on my investment. In this case I would need an additional 3% in order to cover the additional risk involved. Therefore the interest rate evaluate would increase to 12% (9% + 3%).