Company A is considering two fixed interest long-term debt options: a) borrowing at a fixed rate...

Company A is considering two fixed interest long-term debt options: a) borrowing at a fixed rate of 3.5% or b) borrowing at a floating rate of Libor + 0.5% and entering a fixed-for-floating swap at 3.25% for Libor. Which option should the company take? How much interest would the company pay for option b) on a $10 million loan (and swap) at the end of the first year if Libor tuns out to be 2.9%?

Expert Solution

Answer(1)

Under Option-a the total interest expeses will be 3.5%

Under Option-b, if the company enters ino Fixed for Floating swat at 3.25% for LIBOR, the the cost will be=

=LIBOR +0.5%

=3.25%+0.5% = 3.75%.

Hence the company -A should choose option-a, as the interest will be less in option-a

Answer-(2)

Swap is = FIXED FOR FLOATING.

Means Pay fixed receive floating.

Under option-b , the Company will borrow $ 10 million and will enter into swap option, under which he will pay fixed interest Of LIBOR 3.25% +0.25% = 3.75%

the other swap party will give to company A , LIBOR floating+0.5% =2.9% +0.5% = 3.4%

Company A will collect the 3.4% from the opther swap party and will give to its bank as interest

Similarly Other swap party will collect 3.75% interest from the Company A and will give to its bank as interest.

hence Interest to be paid by Company A = $10 Million*3.75% = $0.375 million or $375000

jeff jeffy answered 1 year ago

Select Financial Data Long-term debt $375.0 million Borrowing rate 8% Interest expense $30 million Tax rate...

Select Financial Data Long-term debt $375.0 million Borrowing rate 8% Interest expense $30 million Tax rate 35% Preferred stock dividends $8 million Earnings per share $0 Based on the preceding information, what is the EBIT that Liverpool Inc. must achieve in order to hit its financial breakeven point? 421.15 387.31 40.19 42.31 46.54 After further analysis, Liverpool Inc. has determined that it will not be issuing preferred dividends as it had previously planned. What sort of additional decision-making flexibility will...

Let us say that long-term debt has an interest rate and short-term debt does not. Then...

Let us say that long-term debt has an interest rate and short-term debt does not. Then why not finance your entire operation with non interest bearing short-term payables? Could save you money! What does the current ratio really measure and should it vary depending on the certainty of sales revenue? Note: textbooks probably get this wrong in my opinion.

One of the final topics we will cover involves short term and long-term borrowing options. As...

One of the final topics we will cover involves short term and long-term borrowing options. As interest rates are rising, this is a good time to consider cost of borrowing and pros and cons of leasing. Rent vs. purchase a home; lease vs. purchase a car. Please discuss the advantages and disadvantages of both.

The Smathers Company has a long-term debt ratio (i.e., the ratio of long-term debt to long-term...

The Smathers Company has a long-term debt ratio (i.e., the ratio of long-term debt to long-term debt plus equity) of .43 and a current ratio of 1.27. Current liabilities are $2,395, sales are $10,465, profit margin is 11 percent, and ROE is 16 percent. What is the amount of the firm’s long-term debt? (Do not round intermediate calculations and your answer to 2 decimal places, e.g., 32.16.) What is the amount of the firm’s total debt? (Do not round intermediate...

The Arkham Company has a ratio of long-term debt to long-term debt plus equity of .43...

The Arkham Company has a ratio of long-term debt to long-term debt plus equity of .43 and a current ratio of 1.5. Current liabilities are $990, sales are $6,410, profit margin is 9.3 percent, and ROE is 20.4 percent. What is the amount of the firm’s net fixed assets? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net fixed assets = neither of these are the answer 5362.74, 3,683.75, 5378.53

The Arkham Company has a ratio of long-term debt to long-term debt plus equity of .39...

The Arkham Company has a ratio of long-term debt to long-term debt plus equity of .39 and a current ratio of 1.7. Current liabilities are $950, sales are $6,370, profit margin is 9.8 percent, and ROE is 20 percent. What is the amount of the firm’s net fixed assets? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

You are considering investment in one of the following two options. Assume an interest rate of...

You are considering investment in one of the following two options. Assume an interest rate of 12% per year, compounded monthly. Option A & Option B Initial Cost, respectively -$100,000 -$800,000 Quarterly Maintenance Cost, respectively -$26,000 -$15,000 Salvage Value, respectively $16,000 $200,000 Lifespan (years) 2 & 4, respectively a. What is the effective monthly interest rate? b. What is the effective quarterly interest rate (to 2 decimal places)? c. Draw cash flow diagrams for the two projects. d. Calculate the...

A firm is considering borrowing $1 million at an annual interest rate of 6%. Assume that...

A firm is considering borrowing $1 million at an annual interest rate of 6%. Assume that before considering this capital restructuring , the firm has total debt of $4 million at an annual interest rate of 7% and annual depreciation expense of $400,000. Assuming EBIT of $600,000, what is this company's cash coverage ratio (a) before; and (b) after the proposed restructuring? A. 3.57; 2.94 B. 2.94; 3.57 C. 7.28; 14.29 D. 5.00; 14.29 A firm has been offered a...

Lindsey Contractors' borrowing agreements make certain demands on the business. Lindsey's Long-Term Debt may not exceed...

Lindsey Contractors' borrowing agreements make certain demands on the business. Lindsey's Long-Term Debt may not exceed Stockholder's Equity, and the current ratio may not fall below 1.50. If Lindsey fails to meet this requirement, the company's lenders can take over management of the corporation. Current Liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Lindsey management is scrambling to improve the current ratio. Th controller points out that an investment...

Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a...

Springfield Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $10,000,000 and an interest rate of 8%, and equity capital with a market value of $10,000,000 and a cost of equity of 13.2%. Springfield uses its weighted average cost of capital to calculate the EVA for its Dallas division. For the latest year, the Dallas division had a NOPAT of $250,000, total assets of $1,000,000 and current liabilities of $200,000. The...

Question