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

question 23

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. 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:

Mutual Adjustment

A process of coordination between parties or groups that is based on informal communication and spontaneous problem-solving.

Divisions of Labour

The allocation or distribution of tasks among workers, systems, or organizations, specialized to increase efficiency and productivity.

Routine Tasks

Tasks that are performed in a predictable and standardized manner, often with repetition.

Complicated Tasks

Tasks that involve multiple steps, variables, or components, requiring significant mental effort and skill to solve.