Financial Environment and Firm Value

Paper Summary:

In this article, the writer first outlines some of the major macroeconomic factors in the financial environment and lends perspective on how those impact a firm's value in both the long and short term. The writer then discusses the factors in the financial environment that have a more specific and direct impact on firm value. This is followed by an interpretation of the literature, illustrating how the ways in which a firm reacts to these factors impacts its value in both the short and long term. The writer then reaches some conclusions about the subject and looks at what attention to the financial environment means to a firm in terms of its value.

Outline:
Introduction
The Financial Environment
Discussion
Conclusion
Works Cited

From the Paper:

"One of the most basic ways to derive firm value is with the dividend discount model. From this model, the net present value of future cash flows is derived, with the future cash flows defined as the dividends, typically incorporating a dividend growth factor. The discount rate is directly affected by the prevailing interest rates, and represents the opportunity cost of capital. For the investor, the firm's value is therefore subject to changes in the interest rates. Interest rates are a lagging indicator of the financial environment, confirming environmental trends rather than preceding them.
"Shifts in rates affect different firms in different ways. Aside from the dividend discount, the values of a firm's assets and liabilities are also subject to shifts in interest rates. A rise in interest rates reduces the value of interest-paying assets; the decrease in rates increases the value of those assets."

Sample of Sources Used:

• Pietersz, Graeme. (2008). Exchange Rate Risk. MoneyTerms. Retrieved July 16, 2008 from http://moneyterms.co.uk/exchange-rate-risk/
• No author. (No date). Interest Rate Risk. RiskGlossary. Retrieved July 14, 2008 from http://www.riskglossary.com/link/interest_rate_risk.htm
• McBride, Greg. (2008). Fed Eyes Growing Inflation Risk. BankRate. Retrieved July 24, 2008 from http://www.riskglossary.com/link/interest_rate_risk.htm
• No author. (No date). Financial Environment. Intracen. Retrieved July 16, 2008 from http://www.intracen.org/tfs/welcome2.htm?http&&&www.intracen.org/tfs/targets/fe.htm
• Porter, M.E. (1979) How Competitive Forces Shape Strategy. Harvard Business Review.

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