Company a Can Borrow Money at a Fixed Rate of 7.5

question 54

Multiple Choice

Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 0.5 percent.Company B can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 7 percent.Company A prefers a fixed rate and company B prefers a variable rate.Given this information,which one of the following statements is correct?

• A)Company A can swap with B and pay a fixed rate of 7.25 percent.
• B)If Company A swaps with B, Company A could pay a fixed rate of 6.5 percent.
• C)If Company B swaps with A, Company B must pay a fixed rate of 8 percent.
• D)Company B can swap with A such that Company B pays the variable prime rate.
• E)There are no terms under which both Company A and Company B can swap interest rates and both realize a profit.

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Definitions:

Operating Leverage

A measure of how revenue growth translates into growth in operating income, influenced by the proportion of fixed costs in total costs.

Net Operating Income

Income produced by a firm's regular activities, not including taxes and interest.

Sales Increase

The rise in the quantity or volume of products sold or revenue generated over a specific period.

Variable Expenses

Costs that vary in direct proportion to changes in the level of production or sales volume, such as materials or sales commissions.