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.).
References
(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
