Corporate monetary managers, represented at the highest level by the Chief
Financial Officer (CFO), have many accountabilities around handling the
company's finances in both the short term and the long run. Eventually, the
CFO's broadest mandate is to ensure that the business has access to ample
capital to fund operations, investments required for growth and guarantee
returns to monetary stakeholders. Hence, the corporation's cost of capital is the
main concern of CFOs (www.study.com, n.d.).
Discount rates not only influence the cost of borrowing for corporations, they
also can drastically influence investor perceptions of stock values and stock
market risk, which in turn influences the cost of equity capital for corporations.
For instance, rising discount rates are often interpreted by investors as a sign
that the economy is growing too fast, that inflation is a risk, and growth will
soon slow. These situations make stocks appear to be more risky, and investors
may demand higher returns on share values to compensate for this risk.
Conversely, a small decline in discount rates can spur investors to buy stocks in
anticipation of stronger growth ahead. One key discount rate benchmark in the
US is the federal funds rate. The federal funds rate is the discount rate at which
US banks and credit unions lend reserve balances to other depository
institutions overnight on an unsecured basis. Thus the federal funds rate can
influence short term discount rates for consumers and companies. Investors
also watch the federal funds rate, as rate changes can impact stock values.
Thus, the federal funds rate is seen as key indicator of financial conditions in the
US (www.study.com, n.d.).
Although corporate firms are not immune from the effects of macroeconomic
variables, a basic understanding of these can help financial managers make
informed decisions. One of the most important factors that will influence the
decisions that a corporate financial manager should make is the interest rate.
Interest is a type of macroeconomic variable that affects the price that a
company pays for its use. It is determined by the supply and demand curves for
money.
In March of 2022, the Federal Reserve started to raise interest rates. Since then,
they have gradually increased the rates. This has been a significant change from
the policies of the past few years. Some investors are concerned that the
economy may get hit by a recession due to the increasing interest rates.
After the pandemic, many of the problems that emerged were considered
temporary and would eventually be resolved. However, the Federal Reserve
noted that the shortages of various products, such as cars, were still persisting.
This is a very difficult discussion for me. I am working toward a master's degree
in forensic accounting. Corporate financial management is not something that
interests me at all. While I can see myself potentially working for a large
corporate company, it would be in the capacity of forensic accounting, not
investment or corporate management.
The macroeconomic variable that I expect to be the most impactful in the
future is inflation. There are three indicators that investors can watch for to try
and predict and incoming inflation: federal interest rates, oil (and other energy)
prices, regionalization (lowest cost producer). a Fixed income investments like
CDs or bonds present and future values are impacted by raising inflation. Stocks
have responded well to inflation in the past, but the larger the company the
lower the impact on the stock value. Real assets, like real estate, do well with
inflation. Looking at recent years, we can see how high house prices got
resulting in huge gains for sellers during that time (Effects of inflation on
investments, 2022).
Overall, inflation will have a huge impact on my personal life. Currently, my
family rents our home. Inflation in the real estate market makes it even more
enticing for our landlord to sell the home or even simply raise our rent.
Reference
Effects of inflation on investments. Effects of Inflation on Investments | U.S.
Bank. (2022, September 16). Retrieved January 15, 2023, from
https://www.usbank.com/financialiq/invest-your-money/investment-
strategies/effects-of-inflation-on-investments.html
(n.d.). www.study.com. https://homework.study.com/explanation/what-
macroeconomic-variable-do-you-think-corporate-financial-managers-should-
be-preparing-for-in-the-next-5-to-10-years.html
