EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Transcribed Image Text:CB Solutions. Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating-rate interest payments for fixed rates. Presently, she is paying per annum on
$5,200,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 3.988% per annum. Spread paid over LIBOR, per annum is 2.000%. Heather has just made an interest payment today, so the
next payment is due six months from now. Heather finds that she can swap her current floating-rate payments for fixed payments of 7.004% per annum. (CB Solutions' weighted average cost of capital is 12%, which Heather
calculates to be 6% per 6-month period, compounded semiannually).
a. If LIBOR rises at the rate of 50 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?
b. If LIBOR falls at the rate of 25 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?
C
a. If LIBOR rises at the rate of 50 basis points per 6-month period, starting tomorrow, how much does Heather save or cost her company by making this swap?
The swap ▼for the first six-month period is $. (Select from the drop-down menu and round to the nearest dollar.)
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