Question

how does the interest rate impact the value of the firm? hint: direct and indirect impact

Answer 1

Interest rates will be indirectly and directly impacting the value of the company as it is directly related to the operations of the company.

Direct relationship of interest rate to the company is related to the cost of borrowing in which when the interest rates will be going up in the market, the overall cost of borrowing the company is going up,and it will be leading to lower profits in the hands of the company and when the interest rates will be going down, it will mean that the overall borrowing cost will be going down and it will be increasing the margins of profits for the company.

Indirect impact of interest rates will be related to demand and supply pattern changes of the company because when the interest rates will be going up in the economy, it will be done in order to cut the demand and it will be leading to lower demand and when there will be decrease in the interest rate, it will be done in order to stimulate the demand in the economy and it will be leading to higher sales due to increase in demand of the company.