REPLY TO THIS CLASSMATE ON THE DISCUSSION THREAD WITH 100 WORDS

Risk premiums influence financial decisions because they represent any additional cost that a country or company must include to get financing. This means that if confidence/leverage is low the premium required will be higher. A good example of this on a personal level is when you buy a car. If I want a brand new car then they will being determining the amount of risks. If I have a lot of debt, overdue payments, and have not had a significant change in income that would increase my confidence to pay the banks is going to require a higher premium to loan to me, or financial reward, as loaning to me is a risk. If I apply for a car and have perfect credit, no debt, excellent payment history, and a low income-to-debt ratio I will have no issue getting a loan for a car, and likely with a much lower interest rate than that of the first scenario. This means that when assurance of repayment is low, premiums are much higher and applicants must persuade an investor with a larger monetary repayment- and whatever that difference is, is the "risk premium".

The constant-growth model is typically used to help calculate a fair stock value- meaning it is a tool used to predict whether a company or investments has a financial value higher than what the current trade price is. If a company's fair value is found to be higher that what it is currently trader at then most would consider it a good buy or a smart time to invest within that company by buying shares. The model uses information such as the pay out and the market's expected return rate to mathematically come to a fair value conclusion. Thereby if I wanted to invest in a company's stock but then mathematically the stock value is considered overvalued, I would not invest and if I knew anyone who was already invested I would advise them to sell. This method is not something I would use in my day to day unless I was a day trader or interested in the stock market, after this week maybe I should be!