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

question 49

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.
$$\begin{array} { c c c } & \text { Fixed-Rate Borrowirg } & \text { Floating-Rate BorTownre } \\&\text { Cost } & \text { Cost } \\\text { Compary X } & 10 \% & \text { LIBOR } \\\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ 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 company Y has agreed,but company X will only agree to the swap if the bank offers better terms.
What are the absolute best terms the bank can offer X,given that it already booked Y?

• A)10.45% ?10.45% against LIBOR flat.
• B)10.45%?10.05% against LIBOR flat.
• C)10.50%?10.50% against LIBOR flat.
• D)none of the options

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Definitions:

Economic Life

The estimated period over which an asset is expected to be useful and generate revenue, differing from its physical life.

Off-Balance Sheet Financing

Off-Balance Sheet Financing is a financial obligation that is not directly recorded on the company's balance sheet and is used to keep debt-to-equity ratios low and improve financial indicators.

Operating Expenses

Costs associated with a company's main operational activities, excluding cost of goods sold, financing costs, and taxes.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, resulting in the net income or loss for that period.