Concept explainers
Interest Rate Swaps [LO3] ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit rating in the debt market; it can borrow funds either at an 11 percent fixed rate or at LIBOR + 1 percent floating rate. XYZ Company is a fledgling start-up firm without a strong credit history. It can borrow funds either at a 10 percent fixed rate or at LIBOR + 3 percent floating rate.
a. Is there an opportunity here for ABC and XYZ to benefit by means of an interest rate swap?
b. Suppose you’ve just been hired at a bank that acts as a dealer in the swaps market, and your boss has shown you the borrowing rate information for your clients ABC and XYZ. Describe how you could bring these two companies together in an interest rate swap that would make both firms better off while netting your bank a 2.0 percent profit.
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Chapter 23 Solutions
Fundamentals of Corporate Finance
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- Establish a finance plan that assumes the sales estimates at the take price level would have been increased by $500,000. This means that the current take price level of $9,170,000 would increase by $500,000. This change would offer more collateral to the bank, and the bank would then increase the GAP loan. The GAP loan requires 200% collateral in unsold rights. This change would impact the equity investment. Question: What would be the new equity investment be if the budget stays the same?arrow_forwardRoo-Fus Inc. wants to issue a Eurobond to finance its international expansions. It can choose between two bank syndicates that are willing to back the Eurobond issue, with the following fee schedules: ANZ Westpac Principal 393950 393950 Maturity 4 4 Syndication fee 2.16% 1.86% Interest rate p.a. 6% 3.01% Coupons per year 2 4 Roo-Fus Inc. is otherwise indifferent between the two banks, so it will choose the offer with the lowest effective annual interest rate for the first payment period. What is that effective annual interest rate? Select one: a. 0.03067 b. 0.06132 c. 0.03010 d. 0.03527 e. 0.02760 f. None of these answers is correctarrow_forward[EXCEL] Finance balance sheet: KneeMan Markup Company has total debt obligations with book and market values equal to $30 million and $28 million, respectively. It also has total equity with book and market values equal to $20 million and $70 million, respectively. If you were going to buy all of the assets of KneeMan Markup today, how much should you be willing to pay? please use excelarrow_forward
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- PJ Morgan Bank has bank capital equal to 10% of total assets. Most of its deposits are short-term and adjustable rate. PJ Morgan's assets are long maturity and fixed rate. What is true of the bank? |- Bank capital will fall below 10% of total assets if interest rates increase. II - Bank profits will increase if interest rates drop. III - The bank will have to borrow from the Fed if interest rates increase. IV - The bank has a positive gap. O ,Il and IV O , II, II and IV O l and Il only O , II, and IVarrow_forwardSuppose an investment bank is buying $50 million in long-term mortgage-backed securities and finances the investment by borrowing 70% and paying for the other 30% out of equity. What is the bank's leverage ratio? a) 0.30 b) 0.13 c) 3/7 d) 3arrow_forwardTaxes and WACC [LO3] Sixx AM Manufacturing has a target debt-equity ratio of 0.65. Its cost of equity is 15 percent, and its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company's WACC?arrow_forward
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