ASO Can Borrow Money at Either a fiXed Rate of 7.5

question 304

Multiple Choice

ASO can borrow money at either a fixed rate of 7.5% or a variable rate set at prime plus 0.5% DOT can borrow money at either a variable rate of prime plus 1% or a fixed rate of 7.25% ASO prefers a
fixed rate and DOT prefers a variable rate. Given this information, which one of the following
Statements is correct?

• A) After a swap with ASO, DOT should end up paying a fixed rate of about 7.125%
• B) DOT should end up paying the prime rate if they do an interest rate swap with ASO.
• C) Both firms will profit if they swap a 7.35% fixed rate for a prime plus 0.75% variable rate.
• D) ASO will end up paying no more than 7% as a fixed rate after a swap with DOT.
• E) ASO and DOT cannot swap interest rates in a manner that will be profitable for both firms.

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Definitions:

Materials Price Variance

The difference between the actual cost of materials purchased and the standard cost, multiplied by the quantity of materials purchased.

Raw Materials Price Variance

The difference between the actual cost of raw materials and the expected (or standard) cost.

Raw Materials Quantity Variance

It measures the difference between the expected amount of raw materials needed for production and the actual amount used.

Standard Cost

A predetermined cost of manufacturing a single unit or a specified quantity of a particular product or service, used as a benchmark to measure performance.