What generally happens to a company's net income in a stock-financed deal when interest rates rise?

In a stock-financed deal, rising interest rates typically lead to decreases in stock valuations as they make borrowing more expensive and can reduce the overall attractiveness of equities to investors. When interest rates rise, the cost of capital increases, which can place downward pressure on stock prices due to higher discount rates applied to future cash flows. This reduced valuation impacts the company's net income negatively, particularly in a scenario where the company relies heavily on its stock for financing.

As stock valuations decrease, the market perception of the company’s future earning potential is affected. Investors may anticipate lower growth rates or profitability in an environment of high interest rates, prompting them to reassess their valuations of the stock. Consequently, this anticipated reduction in earnings can result in a decrease in net income, making the correct understanding of this dynamic crucial in evaluating the overall financial health of companies involved in stock-financed transactions.