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MCM- Tutorial 2 - MCM Tutorial 2 Week 3 Q1 Discuss the...

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Week 3 MCM- Tutorial 2
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Increase in interest rate = Increase in borrowing cost = Increasing cost of capital Company forced to borrow money at higher rate to finance it’s operation and expansion. Higher cost needed to be covered with higher company earnings or investment return, otherwise it expose company to credit risk/ inability to pay when loan interest + principal comes due. High interest environment likely to reduce company Interest Coverage Ratio, indicating high debt burden, which likely to reduce company share price. High debt led to higher risk premium, hence depressing company fair value. Consumer spending tend to reduce in high interest environment as a result of lower borrowing opportunity/ higher savings return. Thus, it translate into lower demand & profit for business. Q1. Discuss the impact of interest rate to a company. Interest rate Cost of Borrowing Investment return
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Q2. Discuss the following: Overnight Policy Rate
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