Corporate Finance: Instructor\'s Manual Applied Corporate Finance

Aswath Damodaran 398

I. Sensitivity to Interest Rate Changes

! How sensitive is the firm’s value and operating income to changes in the level

of interest rates?

! The answer to this question is important because it

• it provides a measure of the duration of the firm’s projects


• it provides insight into whether the firm should be using fixed or floating rate debt.

How much has firm value changed for a given change in interest rates?