Question
Wicker Corporation is determining whether to support $100,000 of its permanent working capital with a bank note or a short-term bond. The firms bank offers
Wicker Corporation is determining whether to support $100,000 of its permanent working capital with a bank note or a short-term bond. The firms bank offers a two-year note for which the firm will receive $100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, Wicker can sell 8.5 percent annual coupon bonds with a 2-year maturity and $1,000 par value at a price of $973.97. How many percentage points lower is the interest rate on the less expensive debt instrument?
a. 0.0%
b. 1.2%
c. 1.0%
d. 1.8%
e. 0.6%
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