The Great Genius Final Term Paper (Subjective Questions)
Spring 2013, Exam Date 23 July 2013, Time 12:30pm
Question # 57
How Mergers & Acquisitions Improved market reach and industry visibility.
Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
A company is considering taking the loan of Rs.5 million on which it has to pay semiannual interest at KIBOR plus 1.5%. Company intends to enter into an option against rise in interest rates by buying a CAP at a strike rate of 8%.
There will be two expiry dates within the agreement:
Expiry Six month KIBOR at expiry Period
30 - June Year 1 9% July - Dec. Year 1
31 - Dec. Year 1 6% Jan - June Year 2
1. At which expiry date option will be exercised and why?
2. Calculate cash payment if the option is exercised.
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