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

question 14

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 here: $$\begin{array} { c c c } & \text { Fixed-Rate } & \text { Floating-Rate } \\&\text { Borrowing Cost } & \text { Bortowing Cost } \\\text { Compary X } & 10 \% & \text { LIBOR } \\\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05 percent?10.45 percent against LIBOR flat. Assume both X and Y agree to the swap bank's terms.Fill in the values for A,B,C,D,E,& F on the diagram.

• A)A = LIBOR; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = 12%
• B)A = 10%; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½%
• C)A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; E = 10.05%; F = LIBOR + 1½%
• D)A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½%

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Definitions:

Future Periods

Time frames that lay ahead, in which planning, forecasting, and predictions are aimed towards.

Financial Managers

Executives who develop and implement the firm’s financial plan and determine the most appropriate sources and uses of funds.

Financial Plan

A comprehensive evaluation of an individual's or organization's current and future financial state by using currently known variables to predict future income, asset values, and withdrawal plans.

Funds

Financial resources set aside for a specific purpose or allocated to particular entities or projects.