Instruction 15.1: for Following Problem(s), Consider These Debt Strategies Being Considered by Considered

question 34

Multiple Choice

Instruction 15.1:
For 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 15.1. 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:

Isocost

A line representing all combinations of inputs that have the same total cost.

Capital

Financial assets or the financial value of assets, such as cash or goods, used to generate income.

Isoquant

A curve on a graph representing combinations of inputs that result in the production of the same quantity of output, used in the analysis of production function and input optimization.

Slope

Refers to the steepness or inclination of a line on a graph, representing the rate of change between two variables.