Luther Industries Needs to Borrow $50 Million in Cash

question 10

Essay

Luther Industries needs to borrow $50 million in cash.Currently long-term AAA rates are 9%.Luther can borrow at 9.75% given its current credit rating.Luther is expecting interest rates to fall over the next few years,so it would prefer to borrow at the short-term rates and refinance after rates have dropped.Luther management is afraid,however,that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings.How can Luther benefit from the expected decline in future interest rates without exposure to the risk of the potential future changes to its credit ratings bring?

---

Definitions:

Research Cycle

The research cycle is a series of steps that guide the process of conducting scientific research, from the initial question formulation through to dissemination of findings.

Research Method

A systematic and structured approach to investigating questions and hypotheses, utilizing specific techniques for data collection and analysis.

Research Question

A clear, focused, concise, and arguable question around which research is centered, aiming to address a specific issue or problem.

Selective Observation

The process of focusing attention on specific events or phenomena while ignoring others, which can lead to biased conclusions or skewed perceptions.