1. Describe an interest rate swap and give an example based on the following information. A company with a comparative advantage in the fixed rate market desires a floating rate investment; and vice-versa. A diagram should be used to explain the swap transaction. Explain, in words, why swaps are used to manage the risk of interest rate changes.

2. You are trying to determine the degree of leverage for 2 firms to determine which firm has the highest Operating Leverage, Financial Leverage and Total Leverage. Identify which firm has the highest degree of each type of leverage; Operating, Financial and Total. Which one would you invest in and why?

FIRM A 2020 2021 Sales $1,000,000 $1,200,000 EBIT $250,000 $350,000 Net Income $100,000 $150,000

FIRM B 2020 2021 Sales $2,000,000 $2,200,000 EBIT $175,000 $350,000 Net Income $ 75,000 $150,000