Essay Example on Macroeconomics is defined as the study of Economics









Macroeconomics is defined as the study of economics in relation to the whole exploring a variety of factors Unlike Microeconomics which places its focus on aggregated sectors Although macroeconomics encompasses a broad field it may be loosely broken down into two disciplines the business cycle and economic growth The business cycle involves the examination of cause and effect of short term fluctuations Whereas economic growth examines the factors which help determine long term growth In the case of Home Depot the CEO is convinced that financial analysis should hinge only on what is happening internally within the company The task set forth is to provide a substantive argument to persuade him otherwise Analysis of the Implications of Interest Rate Changes Changes in interest rates an external factor for which the company has no control provide a convincing case as to why the CEO should not focus solely upon internal factors regarding financial analysis Interest rates are incorporated in determining the company's weighted average cost of capital WACC This figure is utilized in several financial analyses For example WACC is applied when calculating the present value of estimated future cash flows FCF Previous analysis of the FCF indicates a negative present value when the interest rate is 8 This is calculated by using the formula PV FVN 1 I N where I is the interest rate and N is the number of years Changes in the WACC would therefore cause a change in the present value PV For example if interest rates decline from 8 to 5 the present value would change from negative 425 78 million to negative 460 69 million 

However if the interest rate were to increase from 8 to 15 the effect would be an increase in the PV to a negative 359 18 million This is due to future cash flows being discounted by the WACC rate Stock Market Impact Another outside influence the CEO should consider when reviewing company financials is the stock market The condition of the market as a whole as well as the company's own stock value will provide additional insight into Home Depot s financial health In a bull market investors are encouraged to invest due to increasing share prices and high rates of return A strong economy promotes increased demand and spending contributing to the company's welfare However in a bear market when businesses are not able to maintain large profit margins investors balk and begin to sell their stock This in turn leads to lower stock prices which adversely affects the company's value As previously stated WACC is used in a multitude of financial formulas The WACC formula is E V x Re D V x Rd x 1 T where E is the market value of the firm's equity D is the market value of the firm's debt V is the total value of capital Re is the cost of equity required rate of return Rd is the cost of debt yield to maturity on existing debt and T is the tax rate The formula alone assures any change in rate will alter the result For instance in the capital budgeting problem WACC is assumed to be 8 resulting in a NPV of 9 785 million and an acceptance of the proposed project If the WACC decreases to 5 the NVP increases to 23 105 million However increasing the WACC to 15 decreases the NPV to 14 362 million resulting in a rejection of the proposed project Impact of External Factors To promote economic growth companies must identify and analyze external factors which might affect its goals or strategies whether adversely or not 

One such tool Home Depot may utilize is the PESTEL PESTLE analysis which identifies political economic social technological legal and environmental factors Other analysis tools are available such as SWOT strength weakness opportunities and threats or variations of the PEST model As the acronym suggests there are various external factors Home Depot should review One such factor would be political Due to international trade agreements Home Depot has the opportunity to expand the international arena However unpredictable government spending political stability and exchange rates pose a threat to that opportunity Environmental factors play a large role in the financial health of Home Depot As stated in Home Depot s Form 10 K The Home Depot stores sell a wide assortment of building materials home improvement products and lawn and garden products and provide a number of services Therefore it stands to reason environmental factors would play a part in decision making and strategic planning Storms fires and other catastrophic events would ensure the demand for product increase thereby increasing the company s and investors financial well being Considering all of these factors it would seem evident that a financial analysis which only included internal factors would be detrimental Incorporating external factors such as political economic and environmental will provide Home Depot a more accurate outlook on the company's financial health in relation to the market and industry as a whole It would also provide a more strategic platform for the company to launch future projects or investments

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