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

WACC, WHAT ARE THE MAIN VIEWS OF WACC PREVALENT IN THE FINANCIAL MANAGEMENT...

WHAT ARE THE MAIN VIEWS OF WACC PREVALENT IN THE FINANCIAL MANAGEMENT LITERATURE

Analysis on the stocks, Yellow: is the company which their stock performanc...

Yellow: is the company which their stock performance was forecasted by analyst Blue: is the name of the company which made the recommendation by the analyst who work for it R

Swap market, Swap Market: The fall of Bretton Wood system in early 1970...

Swap Market: The fall of Bretton Wood system in early 1970s weakened of the pound. It was imperative to stop the downward slide of the pound. In order to control the flow of fo

Cash flow statements, Cash flow statement: The cash flow statement summ...

Cash flow statement: The cash flow statement summarises the flow of cash into and out of the business over a certain period of time. The cash flow statement measures the liq

Illustrate the audit plans, Illustrate the audit plans Audit team must ...

Illustrate the audit plans Audit team must be sufficiently familiar and fully briefed by manager and have knowledge of the business or operation such that to be able to carry o

Describe the types of financial ratios, 1. Describe the types of financial ...

1. Describe the types of financial ratios and other financial performance measures that are used during a venture's successful life cycle. Who are the users of financial performan

The us pension fund system, The US Pension Fund System The US corporate...

The US Pension Fund System The US corporate pension system has matured along with the country's demographic cycle. It consists of both defined benefit plans and defined contrib

Types of asset-backed securities, Types ...

Types of asset-backed securities 1.  Auto Loan-Backed Securities (ALBs) 2.  Credit Card Receivab

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