MINI CASE: THE CENTRALIA CORPORATIONS CURRENCY SWAP

The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost 5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow euros, whereas the normal borrowing rate in the euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow dollars in the U.S. at a rate of 8 percent.

1. Answer the following Questions: a. What amount in USD will the plant cost at a rate of euro to dollar 1.03? b. What amount will be financed? c. How long will the financing be? d. What is the rate in ? e. What is the rate in USD?

2. What would the payments be on a monthly basis: a. in ? b. In USD?

3. Which Currency will supply the cheapest method of financing?

4. Assume that the corporation has agreed to a floating rate loan deal priced at LIBOR plus 2.50% a. What price is the swap? (Assume the 10 yr rate and the 8 yr rate is the same.)

5. Complete the attached Swap Flow Chart

6. How does the SWAP change the calculation in #3?

7. What would you recommend to your Board as the CFO?

CASE \#6 1. Loan Amount : 2. Floating Rate : 3. Swap Rate : 4. Net Rate: CLIENT 30 day LIBOR SWAP RATES CURRENT LIBOR