On-The-Fence Co

question 8

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:

Deposits In Transit

Deposits made and recorded by a company but not yet reflected on the bank statement.

Outstanding Checks

Checks that have been issued by a company but have not yet been cleared or cashed by the recipient.

Discounted Note

A short-term debt security sold for less than its face value that will pay the face value at maturity; it reflects the discounted present value of the future cash flow.

Proceeds

The total amount of money received from a transaction, such as the sale of an asset, before any deductions.