Interest Rates?

Question

Does the movement of interest rates (both increasing and decreasing) affect a firms profitability and how.

any elaborate and fully explained answers will be greatly appreciated.

Answer 1

Generally the lower the interest rate, the higher the profit, because of the cost associated with borrowing. The higher the interest rate, the lower the profit. This is assuming the firm is borrowing money for its' operations. If the firm isn't borrowing money, it shouldn't affect the firm. If the firm is borrowing money, an increase in the interest rate, means the firm has to pay more money to the lender in terms of interest charges than before, meaning there is less money for the firm. If the opposite is true, the firm is paying less money to the lender in terms of interest, so there is more money available to the firm. Expenses affect a firm's profitability, as well as Revenues. Assuming revenues dont' change in either scenario, an increase in the interest rate increase interest expense, while a decrease in the interest rate
has the opposite effect.