Tropical Fruit Drinks issued $10,000,000 in bonds to expand its production facilities. After issuing the bonds, the company was 60% debt financed and 40% common equity financed
Tropical intends to retire 20% of the bonds each year for the next 5 years and not to issue any new debt.
A) All things equal, we would expect Tropical Fruit Drinks cost of capital to decrease gradually over the next 5 years.
B) All things equal, we would expect Tropical Fruit Drinks cost of capital to increase gradually over the next 5 years.
C) All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next 5 years, then decrease rapidly.
D) All things equal, we would expect Tropical Fruit Drinks cost of capital to stay the same for the next five years, then increase rapidly.
Answer: B
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