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

question 78

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: $$\begin{array} { l l l l } & \begin{array} { l } \text { Fixed-Rate } \\\text { Cost }\end{array} & \text { Borrowing } & \begin{array} { l } \text { Floating-Rate Borrowing } \\\text { Cost }\end{array} \\\hline \text { Company X } & 10 \% & \text { LIBOR } \\\text { Company Y } & 12 \% & \text { LIBOR } + 1.5 \%\end{array}$$ A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% 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:

Bank Loan Payable

A financial obligation representing money borrowed from a bank that a company is required to pay back with interest by a specified future date.

Prepaid Insurance

An asset account on the balance sheet representing insurance payments made in advance for coverage that will extend over a future period.

T Account

A visual representation used in accounting to depict the debit and credit sides of an account, helping in the preparation of financial statements.

Credit Balance

A situation where the total credits in an account exceed the total debits, often indicating the amount owed to a creditor.