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Question: Consider a 2-year currency swap between USD and EUR involving floating rates only. The EUR benchmark is selected as 6-month Euro LIBOR, the dollar benchmark is 6-month BBA LIBOR. You also have the following information:
Notional amount = USD10,000,000
Exchange rate EUR/USD = 0.84
a. Show the cash flow diagrams of this currency swap. Make sure to quantify every cash flow exactly (i.e., use a graph as well as the corresponding number).
b. Show that this currency swap is equivalent to two floating rate loans.
c. Suppose a company is trying to borrow USD10,000,000 from money markets. The company has the following information concerning available rates on 6-month loans: EUR LIBOR = 5.7%, USD LIBOR 5 6.7% EURUSD currency swap spread: 1 year-75, 2 years-90. Should this company borrow USD directly? Would the company benefit if it borrowed EUR first and then swapped them into USD?
Ace had 10 million in assets. It is consider a 40 percent debt/asset ratio vs. its current 20 percent debt/asset ratio. Debt arriews interest charges of 12 percent and shares sell for $20 per share.
Problem 2: Smith & James , has total assets of $20,000,000, EBIT of $2,000,000, preferred dividends of $250,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, t..
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which is basically a rapid, rough selection process.
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