Section A

NeuroTech Prosthetics, a high-growth medical technology startup, is seeking additional venture capital funding. The central bank has recently announced a policy of aggressive quantitative tightening and consecutive interest rate hikes to combat inflation.

What is the most likely direct impact of these macroeconomic policies on NeuroTech Prosthetics?

Answer options:

A decrease in the cost of capital, making venture capital funding easier to secure.

An increase in the cost of capital and a decrease in the present value of future cash flows, lowering the company's valuation.

An immediate increase in short-term profitability due to higher interest income on cash reserves.

A reduction in systematic risk as inflation is brought under control.

How to approach this question

Consider the relationship between interest rates, the discount rate, and corporate valuation. High-growth startups rely heavily on future cash flows, which are highly sensitive to discount rate changes.

Full Answer

B.An increase in the cost of capital and a decrease in the present value of future cash flows, lowering the company's valuation.✓ Correct

Quantitative tightening and interest rate hikes increase the risk-free rate, which in turn increases a company's cost of capital (discount rate). For a high-growth startup like NeuroTech, whose value is heavily based on cash flows expected far in the future, a higher discount rate significantly reduces the present value of those cash flows, leading to a lower overall valuation.

Common mistakes

Failing to link macroeconomic monetary policy directly to the discount rate and corporate valuation.

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Practice the full ACCA FM — Financial Management Practice Exam 5

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