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

question 32

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: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. What is the value of this swap to company X?

• A)Company X will lose money on the deal.
• B)Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
• C)Company X will only break even on the deal.
• D)Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.

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Definitions:

Sales Dollars

The total revenue generated from the sale of goods or services, often measured within a specific period.

Total Period Cost

Refers to the sum of all costs associated with production and operations for a specific period.

Variable Costing

An accounting method that assigns only variable production costs to products - those costs that fluctuate with the level of production, such as raw materials and labor.

Unit Product Cost

The total cost (direct materials, direct labor, and manufacturing overhead) divided by the number of units produced.