Question
Forlan Incorporated is planning its debt maturity mix. Management has chosen a debt-equity mix consisting of $6,000 of liabilities and $8,000 of owners' equity. The
Forlan Incorporated is planning its debt maturity mix. Management has chosen a debt-equity mix consisting of $6,000 of liabilities and $8,000 of owners' equity. The yield curve is currently upward sloping: the interest rate on short-term debt is 5% and the interest rate on long-term debt is 8%. Forlan has $5,000 of current assets, anticipates EBIT of $2,500 and has a 35% tax rate.
If Forlan wants to set its debt maturity mix as conservative as possible, it would:
A. Use any debt maturity mix since the debt maturity mix has nothing to do with being conservative.
B. Make half of its liabilities short-term and the other half long-term.
C. Use all short-term liabilities.
D. Use all long-term liabilities.
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