Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants
Question:
Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. At present she is paying LIBOR + 2% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.00% per annum. Ms. O'Reilly has just made an interest payment today, so the next payment is due six months from today.
Ms. O'Reilly finds that she can swap her current floating rate payments for fixed payments of 7.00% per annum. (CB Solution's weighted average cost of capital is 12%, which Ms. O'Reilly calculates to be 6% per six month period, compounded semiannually).
a. If LIBOR rises at the rate of 50 basis points per six month period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap?
b. If LIBOR falls at the rate of 25 basis points per six month period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap?
Cost Of CapitalCost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Assumptions Values Notional principal 5000000 LIBOR per annum 4000 Spread paid over LIBOR per annum ...View the full answer
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
