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Question 4 (credit rating agencies). Suppose credit rating is the only thing that determines companies' debt interest rate. Below is the interest rate associated with
Question 4 (credit rating agencies). Suppose credit rating is the only thing that determines companies' debt interest rate. Below is the interest rate associated with each credit rating. Credit rating Interest rate AAA 3% AA 3.5% A 4.5% BBB 5.5% BB 7.5% Consider a company that is issuing a ten-year fixed-rate bond with principal value $1 billion today. Throughout this question, ignore the time value of money (i.e., a dollar in the future is worth the same as a dollar today). a (a) Suppose the company currently has a credit rating of AA. How much interest expense (in dollar terms) can it save in total over the next ten years if its credit rating become AAA? (b) Suppose the company currently has a credit rating of BBB. How much additional interest expense (in dollar terms) does it incur over the next ten years if its credit rating drops to BB? (C) Suppose the company currently has a rating of BB. The company's c management simply wants to maximize firm value (with no concern about morality), and suppose they is considering to spend up to $X dollars to bribe the credit rating agency to make the credit rating BBB. Assume that bribing always works and will never be caught. How much, at most, is the company management willing to spend
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