Reading 39: Long-Term Liabilities and Leases LOSd习题精选 2010, face, statements, following, interest

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LOS d: Determine the effects of changing interest rates on the market value of debt and on financial statements and ratios.

For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?

A) Debt-to-equity ratio.

B) Interest expense.

C) Cash flow from financing.

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For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. Because changes in interest rates will change the market value of the debt, but not the coupon, interest expense will be unchanged. (However, if a firm has variable-rate debt, interest expense will change when interest rates change, but the market value of the variable-rate debt will not change significantly.)

 

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An increase in interest rates is most likely to benefit:

A) firms that issued debt at a lower cost than current rates.

B) firms with more equity than debt.

C) firms with no debt.

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Firms that issued the debt at a lower cost than the current rates will benefit from an increase in interest rates. The higher interest rates will decrease the market value of their outstanding debt.