ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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O'Reilly and 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
LIBOR +2.00% per annum on $5,200,000 of debt for the next two years, with payments due semiannually.
LIBOR is currently 3.99% per annum. 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 7.001% 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?
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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Transcribed Image Text:O'Reilly and 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 LIBOR +2.00% per annum on $5,200,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 3.99% per annum. 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 7.001% 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? 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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