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

question 11

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 #3 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:

FICA Taxes

Taxes collected in the U.S. to fund the Social Security and Medicare programs, paid by both employees and employers.

Gross Earnings

The total income earned by an individual or a company before any deductions such as taxes or other expenses.

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Federal Unemployment Taxes

Taxes imposed on employers to fund the federal government’s oversight and support of state unemployment insurance programs.