3. Suppose that company B is borrowing $80 million for 5 years at LIBOR minus 20 basis points. Company Buses swap to convert floating rate borrowings into fixed-rate borrowings. /5%borrow (Libor -0.20%)CompanyCompany.ALibor国Swap (cash flowpaid)Swap (cash flowreceived)YearLIBORFloating LoanNet Cashrate (%)FlowYear 14%Year 24.5%Year 35%Year 46%Year 56.5%Total Net Cash Flowb) Why do you think that Company B prefers a fixed-rate debt?

The company will borrow the money for its expansion, or to purchase any capital asset. The…

3. Suppose that company B is borrowing $80 million for 5 years at LIBOR minus 20 basis points. Company B uses swap to convert floating rate borrowings into fixed-rate borrowings. / 5% borrow (Libor - 0.20%) Company Company A Libor 田 Swap (cash flow received) Year LIBOR Floating Loan Swap (cash flow Net Cash rate (%) paid) Flow Year 1 4% Year 2 4.5% Year 3 5% Year 4 6% Year 5 6.5% Total Net Cash Flow b) Why do you think that Company B prefers a fixed-rate debt?

3. Suppose that company B is borrowing $80 million for 5 years at LIBOR minus 20 basis points. Company B uses swap to convert floating rate borrowings into fixed-rate borrowings. / 5% borrow (Libor - 0.20%) Company Company A Libor 田 Swap (cash flow received) Year LIBOR Floating Loan Swap (cash flow Net Cash rate (%) paid) Flow Year 1 4% Year 2 4.5% Year 3 5% Year 4 6% Year 5 6.5% Total Net Cash Flow b) Why do you think that Company B prefers a fixed-rate debt?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

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