Firenza Motors (Italy). Firenza motors of Italy recently took out a 4-year 4.0 million loan on a floating-rate basis. It is now worried, however, about rising interest costs. Although it had initially believed interest rates in the eurozone would be trending downward when taking out the loan, recent economic indicators show growing inflationary pressures. Analysts are predicting that the European Central Bank will slow monetary growth, driving interest rates up. Firenza is now considering whether to seek some protection against a rise in euro-LIBOR, and a forward rate agreement (FRA) with an insurance company. According to the agreement, Firenza would pay to the insurance company at the end of each year the difference between its initial interest cost at LIBOR +2.50% (7.00%) and any fall in interest cost due to a fall in LIBOR. Conversely, the insurance company would pay to Firenza 70% of the difference between Firenza's initial interest cost and any increase in interest costs caused by a rise in LIBOR. LIBOR is currently 4.500%. Purchase of the floating-rate agreement will cost 100,000, paid at the time of the initial loan. What are Firenza's annual financing costs now if LIBOR rises and if LIBOR falls in increments of 0.5%? Firenza uses 12% as its weighted average cost of capital. Do you recommend that Firenza purchase the FRA? IF LIBOR falls 50 basis points per year, the cash flow for Year O is . (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 1 is el (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 2 is - (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 3 is . (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 4 is - (Round to the nearest euro.) The all-in-cost of funds if LIBOR falls by 50 basis points each year is %. (Round to four decimal places.) If LIBOR rises 50 basis points per year, the cash flow for Year O is (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 1 is . (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 2 is (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 3 is ! (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 4 is . (Round to the nearest euro.) The all-in-cost of funds if LIBOR rises by 50 basis points each year is %. (Round to four decimal places.) This rather unusual forward rate agreement is somewhat one-sided in the favor of When Firenza is correct, difference in rates to But when interest rates move against Firenza, only 70% of the difference in rates. And all of that is after paid 100,000 up-front for the agreement regardless of outcome. Not a very good deal. pays the full pays A final note of significance is that since receives only 70% of the difference in rates, its total cost of funds is not effectively "capped"; they could in fact rise with no limit over the period as interest rates rose. (Select from the drop-down menus.) Firenza Motors (Italy). Firenza motors of Italy recently took out a 4-year 4.0 million loan on a floating-rate basis. It is now worried, however, about rising interest costs. Although it had initially believed interest rates in the eurozone would be trending downward when taking out the loan, recent economic indicators show growing inflationary pressures. Analysts are predicting that the European Central Bank will slow monetary growth, driving interest rates up. Firenza is now considering whether to seek some protection against a rise in euro-LIBOR, and a forward rate agreement (FRA) with an insurance company. According to the agreement, Firenza would pay to the insurance company at the end of each year the difference between its initial interest cost at LIBOR +2.50% (7.00%) and any fall in interest cost due to a fall in LIBOR. Conversely, the insurance company would pay to Firenza 70% of the difference between Firenza's initial interest cost and any increase in interest costs caused by a rise in LIBOR. LIBOR is currently 4.500%. Purchase of the floating-rate agreement will cost 100,000, paid at the time of the initial loan. What are Firenza's annual financing costs now if LIBOR rises and if LIBOR falls in increments of 0.5%? Firenza uses 12% as its weighted average cost of capital. Do you recommend that Firenza purchase the FRA? IF LIBOR falls 50 basis points per year, the cash flow for Year O is . (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 1 is el (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 2 is - (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 3 is . (Round to the nearest euro.) If LIBOR falls 50 basis points per year, the cash flow for Year 4 is - (Round to the nearest euro.) The all-in-cost of funds if LIBOR falls by 50 basis points each year is %. (Round to four decimal places.) If LIBOR rises 50 basis points per year, the cash flow for Year O is (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 1 is . (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 2 is (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 3 is ! (Round to the nearest euro.) If LIBOR rises 50 basis points per year, the cash flow for Year 4 is . (Round to the nearest euro.) The all-in-cost of funds if LIBOR rises by 50 basis points each year is %. (Round to four decimal places.) This rather unusual forward rate agreement is somewhat one-sided in the favor of When Firenza is correct, difference in rates to But when interest rates move against Firenza, only 70% of the difference in rates. And all of that is after paid 100,000 up-front for the agreement regardless of outcome. Not a very good deal. pays the full pays A final note of significance is that since receives only 70% of the difference in rates, its total cost of funds is not effectively "capped"; they could in fact rise with no limit over the period as interest rates rose. (Select from the drop-down menus.)