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.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter22: Providing And Obtaining Credit
Section: Chapter Questions
Problem 7P: Effective Cost of Short-Term Credit Yonge Corporation must arrange financing for its working capital...
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