Suppose credit rating is the only thing that determines companies' debt interest rate. Below is the...
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Suppose credit rating is the only thing that determines companies' debt interest rate. Below is the interest rate associated with each credit rating. Credit rating Interest rate AAA AA A BBB BB 3.5% 4.5% 5.5% 7.5% Consider a company that is issuing a ten-year fixed-rate bond with principal value $1 billion today. Throughout this question, ignore the time value of money (i.e., a dollar in the future is worth the same as a dollar today). (a) Suppose the company currently has a credit rating of AA. How much interest expense (in dollar terms) can it save in total over the next ten years if its credit rating become AAA? (b) Suppose the company currently has a credit rating of BBB. How much addi- tional interest expense (in dollar terms) does it incur over the next ten years if its credit rating drops to BB? (e) Suppose the company currently has a rating of BB. The company's manage- ment simply wants to maximize firm value (with no concern about morality), and suppose they is considering to spend up to SX dollars to bribe the credit rating agency to make the credit rating BBB. Assume that bribing always works and will never be caught. How much, at most, is the company manage ment willing to spend? Suppose credit rating is the only thing that determines companies' debt interest rate. Below is the interest rate associated with each credit rating. Credit rating Interest rate AAA AA A BBB BB 3.5% 4.5% 5.5% 7.5% Consider a company that is issuing a ten-year fixed-rate bond with principal value $1 billion today. Throughout this question, ignore the time value of money (i.e., a dollar in the future is worth the same as a dollar today). (a) Suppose the company currently has a credit rating of AA. How much interest expense (in dollar terms) can it save in total over the next ten years if its credit rating become AAA? (b) Suppose the company currently has a credit rating of BBB. How much addi- tional interest expense (in dollar terms) does it incur over the next ten years if its credit rating drops to BB? (e) Suppose the company currently has a rating of BB. The company's manage- ment simply wants to maximize firm value (with no concern about morality), and suppose they is considering to spend up to SX dollars to bribe the credit rating agency to make the credit rating BBB. Assume that bribing always works and will never be caught. How much, at most, is the company manage ment willing to spend?
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a If the companys credit rating improves from AA to AAA its interest rate will decrease from 36 to 3 The interest expense on the bond would be 1 billi... View the full answer
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