ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A company with large variable-rate bank borrowings learns that the central bank has unexpectedly increased its base rate. Which is the most likely immediate effect on the company?
The company's interest costs will rise, reducing profit and cash flow. Variable-rate borrowings reprice when the central bank raises the base rate, so finance costs increase immediately. Higher rates also tend to weaken consumer demand rather than boost it.
- AIts interest costs rise, reducing profit and cash flowCorrect
- BIts interest costs fall, increasing profit
- CIts sales to customers increase because of higher consumer confidence
- DIts borrowings are automatically written down in value
Explanation
Variable-rate loans reprice with the base rate, so higher rates directly raise finance costs and reduce profit and cash flow. Falling costs would follow a rate cut. A rate rise tends to reduce, not raise, consumer demand, and the loan principal is not written down.
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