Question: Company X has an excellent rating for its bonds. Company X is a global entrprise.It has a 20% debt ratio and its earnings have been stable for the past 8 years. The cost of equity to company X is 19%. The board of directors do not want the debt ratio to exceed 40%. Its total capital currently is $520 million with 20% debt. Company X plans to raise $50 million in additional capital. Its investment banking firm assesses that it can raise $50 million in debt with 30-year long-term bonds at 5.5% interest.

Which financing option will company X use?

1. Company X has good bond ratings, so it should use long-term bonds at 5.5% interest rate.

2. Company X has a 20% debt ratio, so it should issue preferred stock.

3. The revenues of Company X are stable, so it should issue common stock.

4. Since Company X is an international firm, it should use equity.