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:

Service Business

A type of business that provides intangible products or services to customers rather than physical goods.

Hospital

A healthcare institution providing patient treatment with specialized medical and nursing staff and medical equipment.

Corporation

A legal entity that is separate and distinct from its owners, capable of owning property, entering into contracts, and being subject to lawsuits.

Business Revenues

The income generated from normal business operations, typically from the sale of goods and services to customers.