Economics and Financial Concerns

Rising interest rates have increased the cost of capital for borrowers over the past year with the result that some projects may have to be postponed due to the higher cost. In recent months, bond prices have also increased, limiting the options available to financial managers. Other organizations might accelerate their capital expansion programs in order to avoid even higher interest rates (working under the assumption that interest rates will go higher). Even those companies which have little direct borrowing are affected by rising interest rates as their suppliers increase prices and their customers put off major purchases. In addition, the stock market has been particularly harsh with regard to hightechnology and "dot com" stocks with the result that raising capital through equity issues can be more difficult now than a few years ago. Companies considering economic expansion might have to turn to debt financing in order to generate the capital required to meet their goals.

Interest rates have risen over the past year as Alan Greenspan and the Federal Reserve have sought to keep the economy from expanding too rapidly. In response, bonds have also recently become more expensive for businesses to issue with interest rates also rising on these financial instruments (Aubin, 2000, p. C17). While some economic expansion is good for the economy and for business, rapid growth can lead to inflation, which Greenspan and others want to curt

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postpone expansion efforts. In some cases, companies are being shut down altogether. Financial managers must therefore consider whether their organization can effectively issue new stock (or add to stock already on the market) and whether the company will be able to sustain the growth necessary to support the stock. If the company is involved with high technology in even a peripheral manner, this option may well be closed to the organization due to investor trepidation. In that case, the company might turn to debt (either through bonds or loans), but interest rates in both of those situations have also crept upward. Certainly financial managers will want to work with underwriters and others if they are to keep equity financing a viable option. References Aubin, D. (2000, November 17). Bonds issued by auto firms decline as investors worry that slowing economy will hurt profits. Wall Street Journal, p. C17. Browning, E. S., & Ip, G. (2000, November 27). Back to basics. Wall Street Journal, pp. C1, C4. Executive Summary Currency fluctuations are a way of life for international companies today, but this was not always the case. Fixed exchange rates were common for much of the twentieth century, and there were al

Category: Economics - E