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problem1. An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 1 percent. These loans are financed by $50 million of fixed-rate guaranteed investment contracts (GICs) costing 10 percent. A finance company has $50 million of auto loans with the fixed rate of 14 percent. They are financed by $50 million of debt with a variable rate of LIBOR plus 4 percent. When the finance company is going to be the swap buyer and the insurance company the swap seller, what is an instance of a feasible swap?

How did they come up the finance company (FC) paying Insurance company (IC) 12% and IC paying FC LIBOR + 2.5%?

problem2. Sewer's Paradise is an all equity firm which has 5,000 shares of stock outstanding at a market price of $15 a share. The firm's management has determined to issue $30,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on debt will be 10 percent. What are the earnings per share at break-even level of earnings before interest and taxes? Ignore taxes.

A. $1.46
B. $1.50
C. $1.67
D. $1.88
E. $1.94

problem3. Miller's Dry Goods is an all equity firm with 45,000 shares of stock outstanding at a market price of $50 a share. The company's earnings before interest and taxes are $128,000. Miller's has decided to add leverage to its financial operations by issuing $250,000 of debt at 8 percent interest. The debt will be used to repurchase shares of the stock. You own 400 shares of Miller's stock. You also loan out funds at 8 percent interest. How many shares of Miller's stock should you sell to offset the leverage that Miller's is assuming? Suppose you loan out all of the funds you receive from the sale of stock. Ignore taxes.

A. 35.6 shares
B. 40.0 shares
C. 44.4 shares
D. 47.5 shares
E. 50.1 shares

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