Analyse the likely impact of changes in interest rates on FE.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2020). The mark or mark type is shown in brackets.

1. [K] Interest rates are part of government monetary policy
2. [K] Interest rates impact the cost of borrowing / reward for saving
3. [K] Interest rates affect the exchange rate and demand in the economy
4. [APP] Linking interest rate increase (2%) to FE's need for external finance: expansion of factory, takeover of Southvolt, building of new factory in country M
5. [APP] Possible appreciation of currency in country M
6. [APP] Reference to gearing of FE (45.85% / 84.7%)
7. [APP] Cost of wind turbines and need for borrowing for investment by power plant operators
8. [APP] Finance deals offered to businesses
9. [APP] $800m loans @ 4% interest $32m; @6% interest $46m
10. [AN] Increase in interest rates will increase the cost of borrowing making expansion plans less profitable
11. [AN] Increased costs for FE may mean that prices are increased which will reduce demand
12. [AN] Appreciation of exchange rate will make FE less competitive in markets to which they export turbines from country M or FE may have to reduce the dollar price in order to remain competitive thus reducing their operating margins
13. [AN] Increase in interest rates may reduce demand for wind turbines due to their high capital cost. Reduced sales will reduce profits for FE.
14. [AN] Potentially greater impact on sales to household market rather than industrial market because luxury good and high proportion of income