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

question 30

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. After the fact, under which set of circumstances would you prefer strategy #2? (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:

Just-In-Time (JIT)

A manufacturing strategy that aims to reduce inventory levels and increase efficiency by producing products only as they are needed.

Defects Tolerated

The acceptable number or percentage of defects or errors allowed in a production or manufacturing process.

Total Quality Management

A comprehensive management approach that focuses on continuous quality improvement of products and services by involving all employees.

Normative Distances

The customary or expected social spaces people maintain during interactions, which can vary culturally.