Luther Industries Needs to Borrow $50 Million in Cash

question 29

Essay

Luther Industries needs to borrow $50 million in cash. Currently long-term AAA rates are 9%. Luther can borrow at 9.75% given its current credit rating. Luther is expecting interest rates to fall over the next few years, so it would prefer to borrow at the short-term rates and refinance after rates have dropped. Luther management is afraid, however, that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings. How can Luther benefit from the expected decline in future interest rates without exposure to the risk of the potential future changes to its credit ratings?
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Recognize the implications of investment decisions on financial performance indicators.

Understand the principles of performance evaluation and the role of controllable versus non-controllable factors.

Differentiate between intrinsic and extrinsic rewards and understand their impact on motivation.

Understand the expectancy theory of motivation and its components.

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An order that includes more than one type or variation of product, often seen in retail or wholesale transactions.

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