Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when short-terms rates are lower than long-term rates? Firms will always be better off when they borrow using long-term financing even if the yield curve is upward-sloping. Short-term interest rates are more volatile than long-term interest rates. A firm will only borrow at short-term rates when the yield curve is upward-sloping. Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other players in the market, for a company to borrow money from the bond market. Cost of Borrowing Money from Impact on Yie ld Scenario Bond Markets Previously, Ferro Co. had only used short-term debt financing. The company now finances its current assets Decrease Increase such as inventories and receivables with short-term debt, and it finances its fixed assets such as buildings and equipment with long-term debt. Bellgotts Inc. has increased its market share from 15% to 37% over the last year while maintaining a profit margin greater than the industry average. Ziffy Corp.'s credit rating was downgraded from AAA to A. ABC Real Estate is a commercial real estate firm that primarily uses short-term financing, while its competitors primarily use long-term financing. Interest rates have recently increased dramatically Cost of Borrowing Money from Bond Markets More expensive Less expensive
Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when short-terms rates are lower than long-term rates? Firms will always be better off when they borrow using long-term financing even if the yield curve is upward-sloping. Short-term interest rates are more volatile than long-term interest rates. A firm will only borrow at short-term rates when the yield curve is upward-sloping. Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other players in the market, for a company to borrow money from the bond market. Cost of Borrowing Money from Impact on Yie ld Scenario Bond Markets Previously, Ferro Co. had only used short-term debt financing. The company now finances its current assets Decrease Increase such as inventories and receivables with short-term debt, and it finances its fixed assets such as buildings and equipment with long-term debt. Bellgotts Inc. has increased its market share from 15% to 37% over the last year while maintaining a profit margin greater than the industry average. Ziffy Corp.'s credit rating was downgraded from AAA to A. ABC Real Estate is a commercial real estate firm that primarily uses short-term financing, while its competitors primarily use long-term financing. Interest rates have recently increased dramatically Cost of Borrowing Money from Bond Markets More expensive Less expensive
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter5: Risk Analysis
Section: Chapter Questions
Problem 2QE
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Transcribed Image Text:Which of the following best explains why a firm that needs to borrow money would borrow at long-term rates when
short-terms rates are lower than long-term rates?
Firms will always be better off when they borrow using long-term financing even if the yield curve is
upward-sloping.
Short-term interest rates are more volatile than long-term interest rates.
A firm will only borrow at short-term rates when the yield curve is upward-sloping.
Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether
yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other
players in the market, for a company to borrow money from the bond market.
Cost of Borrowing Money from
Impact on Yie ld
Scenario
Bond Markets
Previously, Ferro Co. had only used short-term debt
financing. The company now finances its current assets
Decrease
Increase
such as inventories and receivables with short-term
debt, and it finances its fixed assets such as buildings
and equipment with long-term debt.
Bellgotts Inc. has increased its market share from 15%
to 37% over the last year while maintaining a profit
margin greater than the industry average.
Ziffy Corp.'s credit rating was downgraded from AAA to
A.
ABC Real Estate is a commercial real estate firm that
primarily uses short-term financing, while its
competitors primarily use long-term financing. Interest
rates have recently increased dramatically
Transcribed Image Text:Cost of Borrowing Money from
Bond Markets
More expensive
Less expensive
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