Dog's Can Borrow Money at Either a Fixed Rate of 8.25

question 21

Multiple Choice

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus 0.5 percent.Cat's can borrow money at either a variable rate of prime plus 1 percent or a fixed rate of 8 percent.Dog's prefers a fixed rate and Cat's prefers a variable rate.Given this information,which one of the following statements is correct?

• A)After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent.
• B)Cat's should end up paying the prime rate if it agrees to an interest rate swap with Dog's.
• C)Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus 0.75 percent variable rate.
• D)Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with Cat's.
• E)Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both firms.

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Definitions:

Production Budget

A detailed plan showing the number of units that must be produced during a period in order to satisfy both sales and inventory needs.

Ending Inventory

The value of goods available for sale at the end of an accounting period.

Units

A measurement of quantity representing how many pieces, items, or parts are considered in transactions, production, or inventory counts.

Generally Accepted Accounting Principles

A set of accounting standards and practices that are used to prepare financial statements in the U.S., ensuring consistency and comparability.