51) The following would be an example of a policy, not a goal. A) Management sha

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51) The following would be an example of a policy, not a goal. A) Management shall maximize shareholder's wealth. B) Management will hire only happy employees. C) Management will not write uncovered options. D) Management shall minimize the firm's overall weighted average cost of capital. TABLE 9.1 Use the information for Polaris Corporation to answer following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% 52) Refer to Table 9.1. What is the all-in-cost (i.e., the internal rate of return) of the Polaris loan including the LIBOR rate, fixed spread and upfront fee? A) 5.00% B) 5.53% C) 4.00% D) 6.09% 53) Refer to Table 9.1. What portion of the cost of the loan is at risk of changing? A) the upfront fee B) the spread C) the LIBOR rate D) all of the above 54) Refer to Table 9.1. If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan? A) 6.58% B) 5.50% C) 6.09% D) 5.25% 55) Refer to Table 9.1. If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan? A) 4.00% B) 4.50% C) 5.60% D) 5.25% 56) Refer to Table 9.1. Polaris could have locked in the future interest rate payments by using A) an interest rate future. B) a forward rate agreement. C) an interest rate swap. D) any of the above 57) An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an ________. A) forward rate agreement B) interest rate swap C) interest rate future D) none of the above 58) A/an ________ is a contract to lock in today interest rates over a given period of time. A) interest rate future B) forward rate agreement C) interest rate swap D) none of the above 59) An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an ________. A) interest rate future B) interest rate swap C) forward rate agreement D) none of the above 60) An agreement to swap the currencies of a debt service obligation would be termed a/an ________. A) interest rate swap B) currency swap C) forward swap D) none of the above 61) Johnson Industries is currently paying a variable rate loan and desires greater certainty with regard to their loan payments. Refinancing is currently not available so they decide to pursue an interest rate swap agreement. Which of the following will help Johnson stabilize their anticipated cash outflows? Enter into an agreement to: A) Receive a quoted rate and pay LIBOR + 1.50%. B) Receive LIBOR and pay LIBOR + 1.50%. C) Receive LIBOR and pay a quoted rate. D) None of the above will help Johnson Industries pay a fixed amount for their obligations.

Explanation / Answer

"Management will not write uncovered options" is an example of policy for any company rather than only a goal for the compnay.

Hence, Option (C) is correct answer.

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