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Supplementary objective test questions

25 Cameron Co has a variable rate bank borrowing, on which it pays a rate of
LIBOR + 0.6%.

The directors are keen to avoid any unexpected interest payments, so they are
considering entering a three year swap to fix the rate of interest.

Current bank swap rates are 5.25% – 5.60% for LIBOR.

Assuming that Cameron Co enters the swap, what will be the net rate of
interest paid by Cameron Co each year?

A 5.85%

B 6.20%

C 4.65%

D 5.00%

26 An operating lease is best defined by which statement?

A A method of raising finance to pay for an asset

B A contract that transfers substantially all the risks and rewards of
ownership to the lessee

C A contract which allows the transfer of the asset to the lessee at the end of
the lease term

D A contract that allows the use of an asset but does not convey rights of
ownership

27 Walshey Co has already decided to accept a project and is now considering
how to finance it.

The asset could be leased over four years at a rental of $36,000 per year,
payable at the start of each year. Tax is payable at 30%, one year in arrears.
The post-tax cost of borrowing is 10%.

What is the net present value of the leasing option? ______________
(enter your answer in $, to the nearest $000)

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