Suppose a New Company Decides to Raise Its Initial $200

question 14

Multiple Choice

Suppose a new company decides to raise its initial $200 million of capital as $100 million of common equity and $100 million of long-term debt.By an iron-clad provision in its charter,the company can never borrow any more money.Which of the following statements is correct?

• A) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be absolutely certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
• B) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be absolutely certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
• C) The higher the percentage of total debt represented by debentures,the greater the risk of,and hence the interest rate on,the debentures.
• D) The higher the percentage of total debt represented by mortgage bonds,the riskier both types of bonds will be,and,consequently,the higher the firm's total dollar interest charges will be.
• E) In this situation,we cannot tell for sure how,or whether,the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds.Interest rates on the two types of bonds would vary as their percentages were changed,but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.

Explain how infants' experiences with caregivers influence their perception of the world and subsequent emotional development.

Understand the concept of abstractness and how to arrange concepts based on their level of abstractness.

Grasp the definition and implications of abstraction in classification.

Identify and categorize examples of species within a given genus.

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Definitions:

Capital Structure

The blend of financing from debt and equity that a company employs to finance its growth and ongoing activities.

Bank Financing

The process of obtaining funds for business activities, personal needs, or other purposes from a bank.

Operational Decision

An Operational Decision involves choices made by an organization's management regarding day-to-day operations that affect its performance and efficiency.

Primary Market

The financial market segment where new securities are issued and sold for the first time, often through public offerings or private placements.