Company A needs 5-year fixed rate financing and can borrow in fixed rate market at 5% per year. Company A can also borrow in floating-rate market at LIBOR + 0.5%. Company B needs 5-year floating rate financing and can borrow in floating rate market at LIBOR + 2% per year. Company B can also borrow in fixed rate market at 5.5%. a. Calculate the comparative cost advantage of firm A over firm B. b. Which firm should borrow in which market to benefit from the comparative cost advantage? c. If the investment bank that arranges a swap charges 0.2% fee, and company A has more negotiating power, how should swap savings be shared. Assume company A's savings will be twice that of company B's savings.
Company A needs 5-year fixed rate financing and can borrow in fixed rate market at 5% per year. Company A can also borrow in floating-rate market at LIBOR + 0.5%. Company B needs 5-year floating rate financing and can borrow in floating rate market at LIBOR + 2% per year. Company B can also borrow in fixed rate market at 5.5%. a. Calculate the comparative cost advantage of firm A over firm B. b. Which firm should borrow in which market to benefit from the comparative cost advantage? c. If the investment bank that arranges a swap charges 0.2% fee, and company A has more negotiating power, how should swap savings be shared. Assume company A's savings will be twice that of company B's savings.
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 14P
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