Bartel Corp. has decided to build a new manufacturing facility in a foreign country where production costs will be considerably less than costs at Bartel's aging domestic plant. Bartel expects the increased profits from this off-shore facility will completely pay off the cost of construction within seven years. Bartel hopes to finance the new facility with a single debt issue with the lowest possible coupon rate. The form of borrowing best suited to this project would most likely be:
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A. B. C.Explanation
In the given scenario, Bartel Corp. is planning to build a new manufacturing facility in a foreign country. They expect the production costs in the foreign country to be considerably lower than the costs at their existing domestic plant. The company believes that the increased profits from the offshore facility will be sufficient to fully cover the cost of construction within seven years.
Now, Bartel wants to finance the construction of this new facility with a single debt issue, and they aim to obtain the lowest possible coupon rate (interest rate). To determine the most suitable form of borrowing for this project, let's examine the options provided:
A. Medium-Term Notes (MTN): Medium-term notes are debt securities with a maturity typically ranging from one to ten years. They are issued by corporations and can be sold to institutional investors. While MTNs can be an option for financing, they may not be the most suitable choice for Bartel's specific requirements, as they are typically used for shorter-term financing needs.
B. Debentures with a Negative Pledge Clause: Debentures are unsecured debt instruments that are backed by the general creditworthiness of the issuer. They do not have any specific collateral pledged against them. A negative pledge clause is a provision that restricts the issuer from pledging any of its assets as collateral for other debt. While debentures provide flexibility in terms of collateral, they may not be the best choice for Bartel's project because they do not offer the lowest possible coupon rate, which is Bartel's objective.
C. Secured Mortgage Bonds: Secured mortgage bonds are debt instruments that are backed by specific assets, such as property or equipment, which serve as collateral. These bonds provide security to the bondholders in case of default by the issuer, as the specified assets can be seized and sold to recover the debt. Given Bartel's plan to build a new manufacturing facility, secured mortgage bonds may be the most suitable choice. By pledging the new facility as collateral, Bartel can potentially obtain a lower coupon rate, as the bonds are secured by tangible assets. This aligns with Bartel's objective of securing the lowest possible coupon rate.
Based on the given information, the most appropriate form of borrowing for Bartel's project would likely be option C: secured mortgage bonds. This option allows Bartel to finance the new facility with a single debt issue while obtaining a lower coupon rate by using the facility itself as collateral.