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

question 24

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 #1? (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:

Heterocysts

Specialized nitrogen-fixing cells found in some filamentous cyanobacteria, providing an anaerobic environment necessary for the fixation of atmospheric nitrogen.

Nitrogen Cycle

A biochemical cycle that involves the conversion of nitrogen into multiple chemical forms as it circulates among the atmosphere, terrestrial, and marine ecosystems.

Nitrification

A microbial process in the nitrogen cycle where ammonia is converted into nitrite and then into nitrate.

Atmosphere

The layer of gases surrounding a planet, essential for life on Earth, providing air to breathe and protecting from harmful solar radiation.