AFB,IncPurchases a New Delivery Van Which Is Expected to Increase

question 122

Multiple Choice

AFB,Inc.purchases a new delivery van which is expected to increase cash flows for the next 10 years.AFB can finance the purchase with a standard 48-month vehicle loan,or by getting a 10-year loan from the bank.According to the hedging principle,AFB should

• A) use the 10-year financing in order to match the cash flow stream from the asset with the financing repayments.
• B) use the 48-month loan since it matches the type of asset with the type of loan.
• C) use either type of financing, but hedge the risk in the options market.
• D) avoid using either loan and finance the truck with current cash reserves to avoid interest expense.