On-The-Fence Co

question 28

Multiple Choice

On-the-Fence Co.(OTF) is considering issuing an additional $5,000,000 perpetual debt.It is subject to a 35% marginal corporate tax rate but is being told that the costs of financial distress on that additional debt is $1,000,000.What should OTF do?

• A) Do not issue the debt
• B) Issue the debt
• C) It doesn't matter what it does as M&M with perfect markets holds
• D) none of the above

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Definitions:

Forward Rate

The agreed-upon price for a financial transaction that will occur at a future date, used in contracts for interest rates, commodities, and currencies.

Canadian Security

A financial instrument issued in Canada, such as stocks, bonds, or options, that represents an investment in the Canadian market.

Denominated

Indicates the currency in which a financial transaction is specified or an investment is made.

Expected Return

The anticipated average return on an investment under normal conditions, taking into account both the probability of each outcome and the return of each outcome.