Answer to Question #20692 in Economics of Enterprise for mesfin

Question

The rate of interest rises. - will effect value of the firm

Answer 1

Changes in interest rates can affect a firm’s value in several ways:
• First, increases in interest rates will raise the cost of borrowing for consumers, thus reducing the demand for a firm’s products.
• Second, increases in interest rates will raise the cost of financing for the firm which adversely affects firm value.
• Increases in interest rates will also raise investor required rates of return which reduces firm value.
• Firms whose cash flows are most sensitive to interest rate movements are those that commonly sell products on credit. Examples would include auto manufacturers, home builders, boat manufacturers, and appliance manufacturers