A Company Is Planning to Raise $1,000,000 to Finance a New

question 8

Multiple Choice

A company is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

• A) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.
• B) If debt is used to raise the million dollars,but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures,the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
• C) If two classes of debt are used (with one senior and the other subordinated to all other debt),the subordinated debt will carry a lower interest rate.
• D) If debt is used to raise the million dollars,the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.
• E) If debt is used to raise the million dollars,the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.

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Definitions:

Variable Cost

Costs that vary directly with the level of production or service activity.

Fixed Cost

Expenses that do not change with the level of production or sales over the short term, such as rent, salaries, and insurance.

Period Cost

An expense that is not directly tied to the production process but rather incurred over a specific time period.

High-low Method

A technique used in accounting and finance to estimate variable and fixed costs based on the highest and lowest levels of activity.