Question: A firm must raise $100million, all of which will be used to construct a new plant. It is debating the sale of first mortgage bonds

A firm must raise $100million, all of which will be used to construct a new plant. It is debating the sale of first mortgage bonds or debentures. If it decides to issue $50million of each type, as opposed to $75 million of first mortgage bonds and $25 million of debentures. How will this choice affect the cost of mortgage bonds? What effect does this have on the interest rate that a firm must pay on a new issue of long-term debt. Why does it have such an effect?

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