Yes, the firm's investment decision will still be affected by changes in the real interest rate. Even if the firm is investing out of retained profits, it still needs to consider the opportunity cost of using those profits for investment rather than keeping them for other purposes or investing them elsewhere.
Changes in the real interest rate will affect the cost of capital for the firm, which in turn will impact the firm's investment decisions. A higher real interest rate means that the cost of borrowing funds will be higher, which may make it more expensive for the firm to finance its investments through borrowing. This can lead to the firm choosing to invest less or to invest in less risky projects.
On the other hand, a lower real interest rate may make it more attractive for the firm to invest, as the cost of borrowing will be lower. This may encourage the firm to take on more investment projects or to invest in riskier projects with potentially higher returns.
Overall, changes in the real interest rate will still have an impact on the firm's investment decisions, even if it is investing out of retained profits.
9. If a firm invests out of retained profits rather than borrowed funds, will its investment
decision still be affected by the changes in the real interest rate? Explain�
1 answer