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

question 12

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 #1? (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:

Supplemental Wage Payments

Additional wages paid to an employee, varying from regular salary, such as bonuses, commission, overtime pay, and severance pay, which may be taxed differently.

Accountable Plan

This is an IRS-recognized plan that allows businesses to reimburse employees for work-related expenses tax-free, provided certain conditions are met, such as business connection and adequate accounting.

Taxable Fringe Benefits

Benefits provided by an employer to an employee, which are considered taxable income for the employee, such as personal use of a company car.

FUTA Tax

Federal Unemployment Tax Act tax, a payroll tax paid by employers to fund state workforce agencies and unemployment insurance for workers who have lost their jobs.