General Electric (GE) and Intel each wish to borrow the same amount of capital a
ID: 2784177 • Letter: G
Question
General Electric (GE) and Intel each wish to borrow the same amount of capital at low cost potentially wap. They face the following bank loan borrowing rate structure in fixed and floating lending Fixed Rate Borrowing Floating Rate Borrowing 10% LIBOR +3% 75% LIBOR + 2.5% a. Which firm is the more credit-worthy firm? Circle one Intel GE n which market does GE have a comparative advantage? In which market does Intel have a comparative advantage? Circle one for each firm: b. I Intel: FLOATING FIXED GE FLOATING FIXED If GE prefers to borrow at a fixed rate and Intel prefers to borrow at a floating rate, is a mutually beneficial swap possible? Circle one c. YES NO If yes, how many total percentage points in interest could both firms save (that is, combined) if they engaged in an interest rate swap? Fill in the blank Percentage pointsExplanation / Answer
a. Intel, as it can get loan at lower interest rates
b. Intel has competetive advantage in fixed rate loan, GE has in floating rate loan
c. No, as competetive advantages are different swap will not be possible.
GE has to borrow in floating rate and Intel in fixed rate to have a mutually beneficial swap
d. Intel borrows at fixed rate of 7.5% and swaps it to GE, net savings in fixed rate= 10%-7.5%= 2.5%
GE borrows at Libor+3% and swaps it net loss= L+3%-L-2.5%= -0.5%
Net benefit= 2.5%-0.5%= 2%
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