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Effect of Euro Reflection uk

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How inflation has been affected after the European Union trade agreement and introduction of the euro.

Euro’s introduction in Europe was received with high acceptance since majority of the Europe population used it without difficulties. It was estimated that only one in fifth of the total population had difficulties which have remained up to the date. Euro usage has brought about great impacts on inflation linked directly to the Europe economy. This has affected t increase in prices of various things, year after a year; studies showed that the use of the Euro has brought about an increase of the prices of regularly bought things and services like cafes, repairs. In the banking business euro introduction has led to some developments like the withdrawal of the eurocheque system, which is also in a very close association of increase of prices like the cash amounts withdrawn at automatic teller machines in different countries, increased in various countries, increase in cross border withdrawals(Kenneth,2002).

Is inflation likely to increase?

Again, Kenneth (2002) points out that from previous analysis inflation has been on increase. For the purposes of proper making of decisions the company should keenly observe and inquire from the central banks for present and future inflation expectation. In this regard, the company should put into consideration the Inflation expectations from the mostly recent accumulated data collected by decision makers on prices in all electronic goods, labor, money transfers, and foreign exchange rate which translate the possible increase of all kinds of economic businesses inflation. 

Table analysis of the weighted average cost of capital for the company

Given the fact that 

WACC = D/ (D + E) × 1/ (1 - t) × i + E/ (D + E) × r

Where I is the interest rate,
r is the required return on equity,
D is the amount of debt capital,
and Eis the amount of equity capital.

Then:If reflection does not exceed 1.0 % then

An assumption is made that WACC is 9.0%

WACC

Capital invested

Discount

received

Expected

Reflection rate

 Total capital invested

9%

3.5 million

  3.5*2.5%

   =0.08

1.0%

3.5m-0.08

=3.42million

 

If reflection does exceed 1.0% then

WACC

Capital invested

+ increase of  inflection rate

 

Discount

received

Expected

Reflection rate

Total capital invested

9%

3.5 million + 0.035

=3.535 million

  3.535*2.5%

   =

0.088375

 

1.0%

3.535-0.9

=3.526

 

Argument on the company weighted average cost of capital

The company should look forward to purchase for the items before the increase of the inflation. This is because a greater discount of 0.08 million will be realized reducing the expected capital to reducing the total capital for investment to 3.42million which is equivalent to 9.0% WACC. In contrast, if inflations increase more than 1.0% then only a discount of 0.9 will be realized hence increasing the amount of total capital invested in the business

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