Company a Can Issue Floating-Rate Debt at LIBOR + 1

question 1

Multiple Choice

Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR
+ 1) 5%, and it can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

• A) A pays a fixed rate of 9%, B pays LIBOR + 1.5%.
• B) A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.
• C) A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.
• D) A pays a fixed rate of 7.95%, B pays LIBOR.
• E) None of the above answers is correct.

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Definitions:

Work in Process Account

A Work in Process Account tracks the costs associated with unfinished goods that are still undergoing manufacturing or production processes.

Product Costs

Direct costs associated with manufacturing a product, including materials, labor, and overhead expenses.

Valuation of Inventories

The process of determining the monetary value of inventory, using methods like FIFO, LIFO, or weighted average cost.

Management Decision Making

The process managers use to identify and solve problems, involving the evaluation of options and selection of strategies.