1. How much would the effective cost of the borrowing to ABC after the swap? 2. Assuming that the treasury bond rate is 6%, how much is the annual interest expense of DEF? 3. How much is the total cost savings to the holding corporation because of the interest rate swap
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ABC and DEF are subsidiaries to a holding corporation and both need to borrow P10,000,000 for one year. ABC Corporation has the option to borrow at a fixed rate of 13% or at a variable rate of treasury bond rate plus 4%. On the other hand, DEF Corporation has the option to borrow at a fixed rate of 12% or at a variable rate of treasury bonds rate plus 6%. ABC prefers fixed-rate borrowing while DEF prefers a variable-rate one. As the financial adviser, you would recommend an interest rate swap.
1. How much would the effective cost of the borrowing to ABC after the swap?
2. Assuming that the treasury bond rate is 6%, how much is the annual interest expense of DEF?
3. How much is the total cost savings to the holding corporation because of the interest rate swap?
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- East Bank securitises a $50 million pool of its business loans. The asset backed securities (ABS) issued, as a result, come in 3 tranches of bonds: one $10 million tranche with an AAA rating bought by an insurance company fund, a $25 million tranche with a BB rating bought by a superannuation fund and one tranche $15 million with a CCC rating sold to a managed fund. b) Conclude whether East Bank has less credit risk and more funds, as a result of securitization. Explain your answers in details.Company A estimated that it will receive less interest payments and principal payments from its Available-for-Sale investments in Company B’s bonds. Company A does not intend to sell the bonds before they will recover. See the information below: Amortized cost of Company B bonds: $800,000. Discounted value of estimated payments at the interest rate on the date of bond inception: $650,000. Fair value of Company B bonds: $400,000. How will Company A record this assessment? a. Company A will debit Credit Loss Expense by $150,000. b. Company A will debit loss on impairment by $400,000. c. Company A will credit Investment account by $800,000. d. Company A will not record this assessment given that the investment is AFS. e. Company A will debit Credit Loss Expense by $400,000.Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table bel If the corporate tax rate is 22 percent, what is the aftertax cost of the company's debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Aftertax cost of debt
- Galaxy Co. purchases rights to collect monthly rents from real-estate owners and securitizes it into a bond. The firm wants to combine following 3 cash flows and to securitize it into 1000 bonds with identical cash flows. - Annual rent of $20,000 from year 1-10 and lump-sum payment of $500,000 at year 10.- Annual rent of $15,000 from year 1-10 and lump-sum payment of $350,000 at year 10.- Annual rent of $5,000 from year 1-10 and lump-sum payment of $150,000 at year 10 .That says, the combined cash flow of 1000 bonds will be: $40,000 as annual coupon paymentsfrom year 1-10 and $1,000,000 as a face value at year 10. 5. Calculate the cash flow of a single bond for each year, i.e. year 0-10. 6. What is the price of this bond if the discount rate is 2%? Discuss why the price of the bond is at premium/par/discount.Sunland Ltd. has issued bonds that never require the principal amount to be repaid to investors. Correspondingly, Sunland must make interest payments into the infinite future. If the bondholders receive annual payments of $94 and the current price of the bonds is $1,000.00. Your Answer Correct Answer What is the pre-tax cost of this debt? (Round answer to 2 decimal places, e.g. 15.25%.) Pre-tax cost of debt eTextbook and Media Your Answer Correct Answer do % What is the after-tax cost of this debt for Sunland if the firm is in the 40 percent marginal tax rate? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)Pharoah Ltd. has issued bonds that never require the principal amount to be repaid to investors. Correspondingly, Pharoah must make interest payments into the infinite future. If the bondholders receive annual payments of $82 and the current price of the bonds is $820.00. What is the pre-tax cost of this debt? (Round answer to 2 decimal places, e.g. 15.25%.) Pre-tax cost of debt Type your answer here %
- Messman Corporation issues fixed-rate debt at a rate of 9.00%.Messman agrees to an interest rate swap in which it pays LIBOR toMoore Inc. and Moore pays 8.75% to Messman. What is Messman’sresulting net payment? (LIBOR 1 0.25%On Jan. 1, 2021, both ABC Corporation and its subsidiary Alpha Corporation would require loans of P10,000,000 due in 5 years time. ABC prefers a variable interest rate while Alpha prefers a fixed interest rate, but both are open to an interest rate swap. ABC's bank offered (a) 8% or (b) treasury bond rate plus 6%. Alpha's bank offered (a) 11% or (b) treasury bond rate plus 7%. If an interest rate swap was agreed, how much would one pay while the other receive annually with regard to this swap arrangement?Carter Enterprises can issue floating-rate debt at LIBOR + 2% or fixed-ratedebt at 10%. Brence Manufacturing can issue floating-rate debt at LIBOR +3.1% or fixed-rate debt at 11%. Suppose Carter issues floating-rate debt andBrence issues fixed-rate debt. They are considering a swap in which Cartermakes a fixed-rate payment of 7.95% to Brence and Brence makes a payment of LIBOR to Carter. What are the net payments of Carter and Brence ifthey engage in the swap? Would Carter be better off if it issued fixed-ratedebt or if it issued floating-rate debt and engaged in the swap? Would Brencebe better off if it issued floating-rate debt or if it issued fixed-rate debt andengaged in the swap? Explain your answers.
- DEFS Company issues 5% long term debt and engages with FEDS Company in an interest rate swap. In exchange for LIBOR, FEDS will pay 4.5% to DEFS. If the LIBOR is presently 3%, and DEFS CAPM is 6%, what is DEFS net payment? your answer should look like this 4.5 that is not the right answerCompanies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What is rs for Firm U?Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds from Problem 4. The investment banker charges a 2% fee on each bond sold. What is the cost of debt to DMI if the following are the proceeds before the banker's fees are deducted? (Use information from the previous problem) $45,000,000? 16.38% 16.86% 15.06% 17.17% 14.12%