1. The total estimated annual costs for the three strategies are Strategy A B C Total cost 1 $1,900,000 $1,920,000 $1,875,000 Chapter 16 Liability Management and ShortlMedium-Term Financing 517 Strategy C, involving the highest portion of long-term debt, is best, despite the higher interest cost. As we see, interest costs increase with the greater use of long-term and medium-term debt. This pattern is consistent with interest rates rising at a decreasing rate with maturity. Flotation costs decrease the longer the average maturity of the debt, which is in keeping with fewer offerings per year. Finally, expected bankruptcy costs decline the longer the average maturity.

This occurrence is consistent with less uncertainty associated with longterm debt. Also, expected bankruptcy costs decline as more of the debt is made secured, and lenders can turn directly to assets for payment in cases of adversity as opposed to settlement through the bankruptcy courts.