A firm is financed with common stock and long term fixed rate debt; Bob, a CFA charterholder should adjust which of the following items for a change in market interest rates?
a.) interest expense
b.) CFF
c.) debt/equity ratio
The answer says that the debt to equity ratio should be changed. It further states that interest rates will change the market value of bond (but because we calculate book value based on the market rate at the beginning of the period, it doesn’t effect book value) but why does a change in market value (as opposed to book value) effect debt?
Also, if you have variable rate debt, why would the market value of the debt only change slightly?
Thanks!