Synchron Corporation borrowed long-term capital at an interest rate of 8.5 percent under the expectation that the annualinflation rate over the life of this borrowing was likely to be 5 percent. However, shortly after the loan contract was signed, the actual inflation rate climbed to 5.5 percent, where it is expected to remain until Synchrons loan reaches maturity. What is likely to happen to the market value per share of Synchrons common stock? Would its stock price be more affected or less affected than the price of its bonds? Explain your reasoning.
When inflation rate is higher, the purchasing power of a dollar today reduces. That is the amount of goods and services that can bepurchased with the same dollar will be less When inflation rate…
