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Instruction 8.1: For the Following Problem(s), Consider These Debt Strategies Being Considered

question 27

Multiple Choice

Instruction 8.1:
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 8.1. After the fact, under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.)

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Definitions:

Spheroidal Weathering

A form of mostly chemical weathering in which concentric or spherical shells of decayed rock are successively separated from a block of rock.

Rounded Shapes

Forms or outlines that are smooth and curved without sharp angles or edges, often formed by erosion or weathering processes in nature.

Karst Terrain

A landscape formed from the dissolution of soluble rocks such as limestone, dolomite, and gypsum, characterized by underground drainage systems with sinkholes, caves, and springs.

Evaporite Rocks

Sedimentary rocks formed by the precipitation of minerals from evaporating water, typically found in arid environments.