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If a company is financed wholly by equity. Why might it be exposed to interest rate risk?
A. Customers’ disposable income may change.
B. TYU’s competitors may have variable rate borrowings.
C. TYU’s suppliers may have borrowings.
D. TYU’s cost of capital will vary with interest rates.
E. TYU’s competitors may have fixed rate borrowings.Is the answer A. B C D & E?
A – Yes. Disposable income would be less if interest rates rise and sales could suffer
B – Yes. Competitors would have lower costs than currently.if interest rates fall
C – Possibly, if a vital supplier were forced out of business
D – CAPM has the risk free rate in the cost of equity formula, so if interest rates rise so does the cost of equity. However, that will not cause adverse cash flows in TYU,
E – No. Neither TYU nor its competitors are directly affected by interest rates – but CAPM does come into play again.If forced to choose in an exam I would go for A, B, C.
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