Question

Macroeconomic Items: The CEO of the company is convinced that financial analysis should hinge only on what is happening internally within the company. Convince him otherwise based on the following: A. Analyze the implications of interest rate changes on any of the calculations you performed. Be sure to substantiate your claims. B. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial variables, or its overall portfolio management? Be sure your response is supported by evidence. C. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Be sure to justify your reasoning.

1. Original Scenario from Milestone 1 - Time Value of Money using 8%
Interest Rate	8.00%
		FCF1	FCF2	FCF3	FCF4	FCF5
Amounts*		113	111	108	101	97
Pv*		(104.63)	(95.16)	(85.73)	(74.24)	(66.02)
Total Pv*		(425.78)
*In millions
2. Change in interest rate and its implications - Lower Interest Rate (5%)
Interest Rate	5.00%
		FCF1	FCF2	FCF3	FCF4	FCF5
Amounts*		113	111	108	101	97
Pv*		(107.62)	(100.68)	(93.29)	(83.09)	(76.00)
Total Pv*		(460.69)
*In millions
3. Change in interest rate and its implications - Higher Interest Rate (15%)
Interest Rate	15.00%
		FCF1	FCF2	FCF3	FCF4	FCF5
Amounts*		113	111	108	101	97
Pv*		(98.26)	(83.93)	(71.01)	(57.75)	(48.23)
Total Pv*		(359.18)
*In millions

Answer 1

The interest rate is determined by factors outside the company.

The present value of cash flows at 8% interest rate is $425.78 million which increases to $460.69 million at interest rate of 5%. Thus decrease in interest rate by 3%, increases the present value of the cash flows by $460.69 - $425.78 = $34.91 million.

Similarly increase in interest rate to 15% decreases the present value of the cash flows of the firm to $359.18 million i.e. by $425.78 - $359.18 = $66.6 million.

Thus interest rate which is a factor outside the control of the company is affecting the present value of cash flows significantly. Hence factor outside the control of the company can also affect the decisions significantly.