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

question 27

Multiple Choice

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 7.1. Choosing strategy #2 will

• A) guarantee the lowest average annual rate over the next three years.
• B) eliminate credit risk but retain repricing risk.
• C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
• D) preclude the possibility of sharing in lower interest rates over the three-year period.

---

Definitions:

Order Fulfillment Centre

is a specialized facility for processing and shipping orders to customers, handling the storage, picking, packing, and shipping of products.

Factor Weights

Numbers assigned to variables based on their importance, used in mathematical models and decision-making processes to reflect the relative significance of different factors.

Variable Cost

Charges that adjust in relation to the amount of goods produced or level of enterprise activity.