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

question 27

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 #3? (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:

Cash Sales

Sales transactions where payment is made in cash at the time of purchase, without any delay.

Sales Taxes

Taxes imposed by governments on the sale of goods and services, typically calculated as a percentage of the sales price.

FICA - Medicare

A payroll tax that funds the Medicare program, split between employers and employees, based on a percentage of earned wages.

Gross Pay

The gross income of an employee, which is the sum of all earnings before any deductions or taxes are applied.