Assume that Company ABC issues $20 million in long-term debt at par when interest rates were low, and Company DEF issued $20 million in long-term debt at par when interest rates were high. Assuming that interest rates remain high:

a. Which company will have the higher debt to capital ratio (assume no other debt and identical equity)?
b. ABC's debt matures in 18 months and DEF's debt matures in 9 years. What would be the effect on your analysis?

Question

Assume that Company ABC issues $20 million in long-term debt at par when interest rates were low, and Company DEF issued $20 million in long-term debt at par when interest rates were high. Assuming that interest rates remain high:

a. Which company will have the higher debt to capital ratio (assume no other debt and identical equity)?
b. ABC's debt matures in 18 months and DEF's debt matures in 9 years. What would be the effect on your analysis?

Quizplus · Accepted Answer

The Answer of Assume that Company ABC issues $20 million in long-term debt at par when interest rates were low, and Company DEF issued $20 million in long-term debt at par when interest rates were high. Assuming that interest rates remain high:

a. Which company will have the higher debt to capital ratio (assume no other debt and identical equity)?
b. ABC's debt matures in 18 months and DEF's debt matures in 9 years. What would be the effect on your analysis?

Assume That Company ABC Issues $20 Million in Long-Term Debt