Instruction 8.1: For the Following Problem(s), Consider These Debt Strategies Being Considered

question 5

Multiple Choice

Instruction 8.1:
For the following problem(s) , consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. After the fact, under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.)

• A) Your credit rating stayed the same and interest rates went up.
• B) Your credit rating stayed the same and interest rates went down.
• C) Your credit rating improved and interest rates went down.
• D) Not enough information to make a judgment.

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Definitions:

Long-Run Average Cost Curve

A graphical representation showing the lowest average cost of producing any output level when all inputs can be varied.

Plant Size

Plant Size pertains to the capacity or physical dimensions of a manufacturing or production facility.

Diseconomies of Scale

A situation where, as a firm increases production, the costs per unit increase instead of decreasing due to inefficiencies.

Output

The total amount of goods or services produced by a person, machine, or company within a certain period.