Suppose That You Are a Bank Executive and That Two

question 5

Essay

Suppose that you are a bank executive and that two corporations have asked the bank,through you,to buy bonds to finance the respective investments that they'd like to make.The first firm is financed 90% through debt and 10% through equity,while the second firm is financed 50% through debt and 50% through equity.Except for the finance structure and its implications (if any),assume that there are no differences between the two firms.
(a)Suppose that you are unable to determine whether the project the first firm wants you to finance is any better or worse than the project the second firm wants you to finance.Suppose also that you want to lend both corporations the money.Should you charge both of them the same interest rate? Explain.
(b)Suppose that you were instead a firm manager.In which of the corporations would you rather be? Explain.

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Definitions:

Journal

A record where all financial transactions are initially documented in chronological order.

Normal Account Balances

The typical balance side (debit or credit) of an account based on its accounting function.

Increase Side

In double-entry bookkeeping, the side (debit or credit) of an account that is used to record increases in the account's balance, which varies depending on the account type.

Posting

The act of recording financial transactions in the ledger of a company as part of the accounting process.