2. Adelaide corporation- Adelaide corporation of Australia seeks to borrow $30,000,000 USD in the Eurodollar market. Funding is needed for two years. Investigation lead to three possibilities:
a. Adelaide Corporation could borrow the US$30,000,000 for two years at a fixed 5% rate of interest
b. Adelaide Corporation could borrow the US $30,000,000 at LIBOR +1.5% LIBOR is currently at 3.5% and the rate would be reset every six months.
c. Adelaide Corporation could borrow the US $30,000,000 for one year only at 4.5% at the end of the first year, Adelaide corporation would have to negotiate for a new one year loan.
Compare the alternative and make a recommendation
7. Xavier and Zulu. Xavier manufacturing and Zulu products both seek funding a the lowest possible cost Xavier would prefer the flexibility of floating are borrowing, while Zulu want the security of fixed rate borrowing. Xavier is the more credit worthy company. They face the following rate structure Xavier with the better credit rating has lower borrowing costs in both types of borrowing::
Credit rating AAA BBB
Fixed rate cost
Of borrowing 8% 12%
Cost of borrowing LIBOR+1% LIBOR + 2%
Xavier wants floating rate debt so it could borrow at LIBOR+1% however it could borrow fixed at 8% and swap for a floating rate debt Zulu want fixed rate so it could borrow fixed at 12% however it could borrow floating at LIBOR+2% and swap for fixed rate debt what should they do?© BrainMass Inc. brainmass.com October 16, 2018, 5:55 pm ad1c9bdddf
The solution compare three funding alternatives and makes a recommendation. The solution also provides an answer to a problem on interest rate swaps.
Borrowing at Floating vs Fixed rate, Interest rate swap, Hedging alternatives
1. Two Lips, Limited, a Dutch bulb exporter, needs to borrow $40,000,000 for three years. They have the following alternatives: (a) Borrow for 3 years at 6.25% fixed rate. (b) Borrow at LIBOR + 1.75. LIBOR is currently 3.5% and will reset every six months over the life of the loan. (c) Borrow for one year at 4.75%. They would refinance the loan at the end of the year. What are the advantages and disadvantages of each alternative? What should they do? Why?
2 Itsa Corporation and Ovah, Limited both seek funding at the lowest possible cost. Itsa would prefer a floating-rate loan while Ovah wants the stability of fixed-rate borrowing. Itsa is more creditworthy. Itsa is AA rated, can borrow at 6% in the fixed rate market, and can borrow at LIBOR +2% in the floating rate market. Ovah is BB rated, can borrow at 10% in the fixed rate market, and can borrow at LIBOR + 3% in the floating rate market. What should they do?
3.Uncle Ben's uses imported rice from Japan. Payment of ¥12,000,000 is due in 3 months. The current spot rate is ¥123/$, the 3-month forward rate is ¥120/$, and the 6-month forward rate is ¥119/$. The annual Japanese interest rate is 0.75% while the annual U.S. interest rate is 2.00%. A 3-month call option with a ¥123 strike has a 3.5% premium while a 6-month call options with a ¥123 strike requires a 5.0% premium. The company's weighted average cost of capital is 11%. What are the costs of each alternative? What are the risks of each alternative? Which alternative should Uncle Ben's choose if it is willing to take a reasonable risk?View Full Posting Details