Instruction 9.1: For the Following Problem(s), Consider These Debt Strategies Being Considered

question 13

Multiple Choice

Instruction 9.1:
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 9.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is (Assume your firm is borrowing money.)

• A)that interest rates might go down or that your credit rating might improve.
• B)that interest rates might go up or that your credit rating might improve.
• C)that interest rates might go up or that your credit rating might get worse.
• D)none of the above

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Definitions:

Expansion Options

Strategic choices available to a business to increase its size, offerings, or operational capacity.

Minimizes Cost

The process or approach aimed at reducing expenses and spending to the lowest possible level.

Central Hub

Central hub refers to a focal point or a core center where activities, processes, or networks converge, often used to optimize distribution or communication.

Travel Time

The duration required to move goods or personnel from one location to another.