Answer-first summary for fast verification
Answer: LIBOR plus 180 basis points
Comparative advantage is neutralized when the difference in borrowing costs is the same in both markets. - Fixed-rate difference: 7.8% - 7.0% = 0.8% = 80 bps So the floating-rate difference must also be 80 bps. Company A’s floating rate is LIBOR + 100 bps, so Company B’s floating rate must be: - LIBOR + 100 bps + 80 bps = LIBOR + 180 bps Thus, the correct answer is **D**.
Author: Manit Arora
Ultimate access to all questions.
Q-174.4. Company A can borrow at 7.0% in fixed-rate markets and LIBOR plus 100 basis points in floating rate markets. If Company B, which is riskier, can borrow at 7.8% in fixed markets, at which borrowing rate in the floating rate market would any comparative borrowing advantage be neutralized such that NEITHER company has a comparative advantage in the fixed nor floating rate market?
A
LIBOR plus 20 basis points
B
LIBOR plus 80 basis points
C
LIBOR plus 120 basis points
D
LIBOR plus 180 basis points
No comments yet.