Question

1. Assess the implications of a fall in borrowing rates for a company that is funded by both equity and debt.

Answer 1

Fall in the borrowing rates will reduce the companies debt obligations. The cost of debt becomes cheaper. This will reduce the overall cost of capital of the company. When the cost of debt obligations decrease, as a result, the profit available for the equity shareholders will increase. This will increase the Earnings Per Share of the company. When EPS increases, the share price in the market may increase if it is a public company. Thus the Wealth of the shareholders will increase.

Thus, the fall in the borrowing rates is good for the company. The companies if want, can raise more debt capital.