A Firm Can Borrow at a Fixed Rate of 6

question 105

Multiple Choice

A firm can borrow at a fixed rate of 6.5% on long-term loans.If it swaps its long-term payments so that it receives 4% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

• A)LIBOR + 2.5%
• B)LIBOR
• C)LIBOR + 6.5%
• D)LIBOR - 2.5%
• E)LIBOR - 4%

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Definitions:

Retained Earnings

Profits that a company keeps, after dividends are paid, to reinvest in the business or to pay off debt.

Constant Growth

A model assuming that dividends, earnings, or other financial metrics grow at a steady, unchanging rate indefinitely.

Balance Sheet

A financial statement showing a company's assets, liabilities, and equity at a specific point in time, providing a snapshot of its financial condition.

Capital Structure

The mix of different types of debt and equity a company uses to finance its operations.