Plymouth plc wishes to borrow £80 million at a fixed interest rate to fund a project. The firm would pay a fixed rate of 6% p.a., but can alternatively borrow with a floating rate LIBOR+3% p.a. Truro plc is currently looking to borrow £80 million for a project with a floating interest rate. The company would pay a floating rate of LIBOR+2.4% p.a., but can alternatively borrow with a fixed rate of 5% p.a. The two companies decide to enter a swap in which the benefit is shared equally. In the agreement, Plymouth plc's swap payment to Truro plc is to be 5% p.a. Which of the following statements about the swap agreement is most likely to be true? A Plymouth plc receives LIBOR+1.2% p.a. from Truro plc Truro plc's net borrowing cost is LIBOR+3.2% p.a. Truro plc borrows £80m loan from its bank at a floating rate of LIBOR+3% p.a. D в Plymouth plc's net borrowing cost is 5.8% p.a. Each company can save 0.4% p.a., benefiting equally from the swap E

Plymouth plc wishes to borrow £80 million at a fixed interest rate to fund a project. The firm would pay a fixed rate of 6% p.a., but can alternatively borrow with a floating rate LIBOR+3% p.a. Truro plc is currently looking to borrow £80 million for a project with a floating interest rate. The company would pay a floating rate of LIBOR+2.4% p.a., but can alternatively borrow with a fixed rate of 5% p.a. The two companies decide to enter a swap in which the benefit is shared equally. In the agreement, Plymouth plc's swap payment to Truro plc is to be 5% p.a. Which of the following statements about the swap agreement is most likely to be true? A Plymouth plc receives LIBOR+1.2% p.a. from Truro plc Truro plc's net borrowing cost is LIBOR+3.2% p.a. Truro plc borrows £80m loan from its bank at a floating rate of LIBOR+3% p.a. D в Plymouth plc's net borrowing cost is 5.8% p.a. Each company can save 0.4% p.a., benefiting equally from the swap E

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Pepper Corp. wants to finance an investment worth an amount equivalent to USD 185 million. It can borrow fixed-rate JPY at a rate of 4.56%, or it can borrow floating-rate USD at LIBOR + 0.25%. Truffles Corp. also faces a USD 185 million investment, and it can borrow fixed-rate JPY at a rate of 4.8%, or it can borrow floating-rate USD at LIBOR + 0.88%. Pepper Corp. would like to borrow fixed-rate JPY and Truffles Corp. would like to borrow floating-rate USD. What are the possible cost savings to Pepper Corp. in INR terms from a swap agreement if Westpac charges a fee of 8 basis points to arrange the swap? Assume all remaining cost savings accrue to Pepper Corp. Assume the current exchange rate is JPY75/USD. a. 43.0125 million b. 0.0096 million c. 54.1125 million d. 0.0076 million e. There are no cost savings to Pepper Corp. from a swap.
A company borrows $4 to finance a project. It has two choices when beginning the project. The first option has potential payoff of either $2 or $8 (both equally likely). The second option has potential payoffs of $0 or $16 (both equally likely). The lender would prefer the _____ option because the expected value of the first option is option is and the expected value of the second first; $3; $2 first; $8; $5 second; $5; $8 second; $16; $4
A Ltd, a low rated firm desires a fixed rate, long term loan, It currently has access to floating interest rate funds at a margin of 1.5% over the prime rate. Its direct borrowing cost is 13%in the fixed rate bond market. B Ltd which prefers a floating rate loan has access to fixed rate funds in cedi-bond market at 11% and floating rate funds at prime rate 1/2%. you are required to : (i)To explain how A Ltd and B Ltd can use swap to their advantage. (ii)Calculate how much Asaba Ltd would pay for its fixed rate funds.
Investment Solution (IS) and ExpressIT (EIT) both need to borrow $100 000 to finance the development of new products. IS can borrow fixed-interest-rate funds at 9 percent or variable-rate funds at the LIBOR plus 1.5% in the debt market. EIT, being less creditworthy, incurs higher costs of borrowing which are a fixed rate of 11 percent and a variable rate of LIBOR plus 2.5%. Design a swap and calculate the amount of saving on the net cost of borrowing if BankCredit offers an interest swap contract with each IS and EIT, given that BankCredit retains a 20bp between the rates at which it deals equally with them. Label the graph below and show all calculations leading to your conclusions.
A firm has £ 100m cash in hand and a debt obligation of £ 100m due at the end of the year. With this amount of cash, it can take one of two projects, A or B, which cost £ 100m each. At the end of the year, project A pays £ 120m if the economy is favourable and £ 60m if the economy is unfavourable. In contrast, project B pays £ 101m regardless of the state of the economy. Assume that the firm is not able to raise any additional funds. Further, assume that investors are risk-neutral, there are no taxes and no direct costs of bankruptcy, the risk-free rate of interest is nil, and the probability of each state of the economy is equal. i. What is the NPV of each project? ii. Which project will equity holders want the firm's manager to take? Explain. iii. Calculate the magnitude of the agency cost of risk shifting. iv . Assume that the firm's manager works on behalf of the equity holders. Should debtholders engage in debt forgiveness and accept a lower debt obligation equal to £ 82m?…
A Ltd, a low-rated firm desires a fixed rate, long-term loan. It currently has access to floating interest rate funds at a margin of 1.5% over the Prime Rate. Its direct borrowing cost is 13% in the fixed-rate bond market. B Ltd which prefers a floating rate loan has access to fixed-rate funds in cedi-bond market at 11% and floating rate funds at Prime Rate + ½%. Explain how A Ltd and B Ltd can use swap to their advantage also Calculate how much Asaba Ltd would pay for its fixed-rate funds?
A sovereign borrower is considering a $100 million loan for a 4-year maturity. It will be an amortizing loan, meaning that the interest and principal payments will total, annually, to a constant amount over the maturity of the loan. There is, however, a debate over the appropriate interest rate. The borrower believes the appropriate rate for its current creditstanding in the market today is 10%, but a number of international banks with which it is negotiating are arguing that it is most likely 12%, at the minimum 11%. What impact do these different interest rates have on the prospective annual payments? Loan Payments 1 2 3 4 Principal $100 Interest (10.00) (7.85) (5.48) (2.87) Interest rate .10 Principal (21.55) (23.70) (26.07) (28.68) Maturity (years) 4.0 Total (31.55) (31.55) (31.55) (31.55)
A company can borrow funds at LIBOR minus 50 basis points. There is a swap available where one side pays 7% and the other side pays LIBOR-1%. The company is concerned that interest rates will increase and, thus, wants to change the nature of its liability from paying floating to paying fixed rate. What rate can the company pay on its lability after it engages in the swap?
You are planning to issue debt to finance a new project. The project will require $20.86 million in financing and you estimate its NPV to be $15.199 million. The issue costs for the debt will be 2.7% of face value. Taking into account the costs of external financing, what is the NPV of the project? The new NPV will be $ __ ? (Round to the nearest dollar.)
Consider an FI with the following off-balance-sheet items: A two-year loan commitment with a face value of $120 million, a standby letter of credit with a face value of $20 million and trade-related letters of credit with a face value of $70 million. All counterparties have a credit rating of BBB. Assuming a required capital ratio of 8%, what is the capital amount the FI needs to hold against these exposures? ANSWER MUST BE 7.52 million
Roo-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 correct
Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at a fixed rate. B wants to finance a $100,000,000 project at a floating rate. Both firms want the same maturity, 5 years. Firm A B Fixed Rate $ 10.3% $ 8.9% Prime + 1/2% Floating Prime + 1% Construct a mutually beneficial interest only swap that makes money for A, B, and the swap bank in equal measure. Assume that Party B pays prime rate to swap bank while the swap bank pays prime rate to party A. In that situation, what rate should the swap bank pay to Party B. Show all work. A) 9% B) 8.7% C) 8.9% D) Prime + 1% E) None of the above

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