Suppose International Digital Technologies decides to raise a total of $200 million, with $100 million as...

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Suppose International Digital Technologies decides to raise atotal of $200 million, with $100 million as long-term debt and $100million as common equity. The debt can be mortgage bonds ordebentures, but by an iron-clad provision in its charter, thecompany can never raise any additional debt beyond the original$100 million. Given these conditions, which of the followingstatements is CORRECT?
a. If the debt were raised by issuing $50 million of debenturesand $50 million of first mortgage bonds, we could be certain thatthe firm's total interest expense would be lower than if the debtwere raised by issuing $100 million of first mortgage bonds.
b. The higher the percentage of debentures, the greater therisk borne by each debenture, and thus the higher the required rateof return on the debentures.
c. If the debt were raised by issuing $50 million of debenturesand $50 million of first mortgage bonds, we could be certain thatthe firm's total interest expense would be lower than if the debtwere raised by issuing $100 million of debentures.
d. The higher the percentage of debt represented by mortgagebonds, 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 wouldbe affected by the mix of debentures versus first mortgage bonds.The interest rate on each of the two types of bonds would increaseas the percentage of mortgage bonds used was increased, but theresult might well be such that the firm's total interest chargeswould not be affected materially by the mix between the two.

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Option E In this situation we cannot tell for sure how or whether the firms total interest expense on the 100 million of debt would be affected by the mix of debentures versus first See Answer

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Suppose International Digital Technologies decides to raise atotal of $200 million, with $100 million as long-term debt and $100million as common equity. The debt can be mortgage bonds ordebentures, but by an iron-clad provision in its charter, thecompany can never raise any additional debt beyond the original$100 million. Given these conditions, which of the followingstatements is CORRECT?a. If the debt were raised by issuing $50 million of debenturesand $50 million of first mortgage bonds, we could be certain thatthe firm's total interest expense would be lower than if the debtwere raised by issuing $100 million of first mortgage bonds.b. The higher the percentage of debentures, the greater therisk borne by each debenture, and thus the higher the required rateof return on the debentures.c. If the debt were raised by issuing $50 million of debenturesand $50 million of first mortgage bonds, we could be certain thatthe firm's total interest expense would be lower than if the debtwere raised by issuing $100 million of debentures.d. The higher the percentage of debt represented by mortgagebonds, 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 wouldbe affected by the mix of debentures versus first mortgage bonds.The interest rate on each of the two types of bonds would increaseas the percentage of mortgage bonds used was increased, but theresult might well be such that the firm's total interest chargeswould not be affected materially by the mix between the two.