Explore BrainMass

Explore BrainMass

    Changes in interest rates

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Need to answer the issues that deals with Big Drive Auto. In which these issues need to be address. The following issues that are in the context of the scenario:
    o Identify decisions made by key organizational stakeholders that are affected by interest rates
    o Identify how interest rates affect the cost of operating the business
    o Find the current yield curve and interpret the effect of its shape on decision-making within the organization
    o Evaluate how changes in interest rates affect the customer demand for the product in the scenario
    o Explain how business planning and operations are dependant on monetary variables other than interest rates


    © BrainMass Inc. brainmass.com October 9, 2019, 11:43 pm ad1c9bdddf


    Solution Preview

    See the attached Excel sheet for data.

    1. Identify decisions made by key organizational stakeholders that are affected by interest rates.

    The first step is to identify the key stake holders in this scenario. They are the firm, the consumers, and the government/monetary authority. In the present case the third stakeholder is the Fed: the authority that determines the interest rates. The firm is Big Drive Auto, and the consumers are people who use the service of Big Drive Auto. Before getting into how the decision of consumers and the firm are affected by interest rates look at the data in the table and try to relate what you see there with the state of the economy as a whole. Sales were rising from 1998 to 2000 and there is a sudden drop in the sales in 2001. Interest rates had just peaked before the slump in sales. Usually that will mean it is harder for consumers to get cheap credit and hence they will postpone their consumption decision. 2000 also marked the peak of the dot-com bubble and the economy went into a recession as the bubble burst. To prevent a big collapse in the GDP the Fed lowered the rate, and this can be seen in the attached sheet. But, since the economy had gone into a recession the falling interest rates didn't do enough to increase sales at Big Drive. The sales though rose as the impact of the recession lessened. Thus we can say that interest rates determine the amount of consumption since the interest rates determine the price of available credit.

    The firm also needs to make some decisions that are influenced by interest rates the most important ones being how to finance the day to day operation. Should the firm get into a long term credit or should it wait for the rates to fall and roll-over short term credit. It also needs to decide how to pay its suppliers, and whether to consider the option of getting credit in the international market. They also need to decide whether to get into long term pricing arrangements with suppliers since prices are influenced by interest rates. Thus, the very operation of the firm ...

    Solution Summary

    Changes in interest rates are examined.