Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 76

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of 9.90%.In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR - 0.15%; What is the value of this swap to company Y?

• A)Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year.
• B)Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
• C)Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year.
• D)Company Y will only break even on the deal.

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Definitions:

Market Analysis

An evaluation to understand the dynamics of a specific market, including size, trends, and competition.

Red Herring Prospectus

A preliminary document shared by a company with potential investors before an initial public offering (IPO), which details the company's operations and financials but does not include the price or size of the offering.

Executive Summary

A brief section at the beginning of a document, summarizing the most important points for quick review.

Forecasting External Financing

It involves predicting the amount of external funding a company will need to support its anticipated growth and operational needs.