Calculate the quality spread differential, Financial Management

Assignment Help:

Alpha and Beta Companies can borrow at the subsequent rates.

                                                           Alpha              Beta

Moody's credit rating                              Aa                   Baa

Fixed-rate borrowing cost                     10.5%              12.0%

Floating-rate borrowing cost                  LIBOR            LIBOR + 1%

1. Calculate the Quality Spread Differential (QSD).

2. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Suppose Alpha desires floating-rate debt and Beta desires fixed-rate debt.

Solution:

1.  The QSD = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) = .5%.

2.  Alpha requires to issue fixed-rate debt at 10.5% and Beta requires to issue floating rate-debt at LIBOR + 1%.  Alpha requires to pay LIBOR to Beta.  Beta requires to pay 10.75% to Alpha.  If this is completed, Alpha's floating-rate all-in-cost is:  10.5% + LIBOR - 10.75% = LIBOR - .25%, a .25% savings over issuing floating-rate debt on its own.  Beta's fixed-rate all-in-cost is:  LIBOR+ 1% + 10.75% - LIBOR = 11.75%, a .25% savings over issuing fixed-rate debt.


Related Discussions:- Calculate the quality spread differential

Describe career opportunities in the field of finance, List and describe th...

List and describe the three career opportunities in the field of finance? Finance has three key career paths: financial markets and institutions, financial management and inves

Define which is lower cost of debt or cost of equity, Which is lower for a ...

Which is lower for a given company:  the cost of debt or the cost of equity?  Explain: Ignore taxes in your answer . The cost of debt is all the time less as compared to the cost

Assessing impact on management risk, Assessing Impact: As with the asse...

Assessing Impact: As with the assessment of likelihood, a valuable way of assessing impact would be the creation of categories of impact as follows: Level

Financial Management, BigGardens Ltd (BigGardens) is a private company that...

BigGardens Ltd (BigGardens) is a private company that owns and operates a chain of garden centres in the Bristol area. The company has expanded rapidly over recent years, opening

Determine earnings per share, Q. Determine Earnings per share? Current ...

Q. Determine Earnings per share? Current earnings per share = 100 × (4550 - 225)/ 5000 = 86.5 cents Earnings per share after one year = 100 × (4508 - 225)/ 5000 = 85.7 cents

Explain the term- operating segments, Operating segments An operating s...

Operating segments An operating segment is a component of an organisation It engages in business activities from that it can earn revenues and incur expenses(this also c

Cash flow matching, Cash flow matching strategy is used to build a ...

Cash flow matching strategy is used to build a bond portfolio wherein the cash flows of the bond portfolio exactly match a stream of liabilities. The most s

Describe working capital decision, Q. Describe Working Capital Decision? ...

Q. Describe Working Capital Decision? Working Capital Decision: - It is anxious with the management of current assets. It is a significant function of financial management. Cur

Ansawar, explain the concept of working capital.what are the factors which ...

explain the concept of working capital.what are the factors which influence the working capital?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd