Transcribed Image Text: 3. Suppose that company B is borrowing $80 million for 5 years at LIBOR minus 20 basis points. Company B uses swap to convert floating rate borrowings

Transcribed Image Text: 3. Suppose that company B is borrowing $80 million for 5 years at LIBOR minus 20 basis points. Company B
uses swap to convert floating rate borrowings into fixed-rate borrowings. /
5%
borrow (Libor -0.20%)
Company
Company.
A
Libor

Swap (cash flow
paid)
Swap (cash flow
received)
Year
LIBOR
Floating Loan
Net Cash
rate (%)
Flow
Year 1
4%
Year 2
4.5%
Year 3
5%
Year 4
6%
Year 5
6.5%
Total Net Cash Flow
b) Why do you think that Company B prefers a fixed-rate debt?

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