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Gervase Jackson is a student in corporate finance class. Jackson is unsure how debt ratings tie into a company’s capital structure and decides to talk to his professor after class. In their discussion, the professor makes the following statements:
Statement 1: The most common way that firms use debt ratings in conjunction with capital structure is to set a certain minimum debt rating that the firm strives to stay above at all times.
Statement 2: A change in debt rating from investment grade to speculative grade will significantly increase the firm’s cost of debt capital.
With respect to the statements made by Jackson’s professor: A. both are correct. B. both are incorrect. C. only one is correct. |