Question

How might decline price affect a firm’s decision to borrow and invest ? (See News,p.212)

Answer 1

The decline in prices is a situation of recession in a modern economy.As in it the sales ,revenue and profits decline ,so the manufacturer goes the way of disinvestment and stop buying new equipment and curtails R&D hence it will reduce advertising and marketing thus cost - cutting efforts will impact other businesses hence there is very low scope of investment .Similarly the customer pays late or delay payments which reduces the valuation of the corporation debt and ability to obtain finance .The companies ability to service its debt may also gets affected and it will damage the credit ratings and reduces the borrowing ability.