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A company’s board of directors is considering the plan for capital expenditures. A director asks the chief financial officer how the appropriate rate of return is set for evaluating capital expenditures. The CFO responds that the company uses the after-tax weighted average cost of capital and that the current value is 13 percent. If the combined tax rate is 45 percent, the before-tax cost of borrowed capital is 14 percent, and equity comprises 60 percent of the capitalization of the company, what is the percent return to shareholders?
The 1-year LIBOR zero rate is 3% per annum and the LIBOR forward rate for the 1- to 2-year period is 3.2%. The 3-year swap rate for a swap with annual payments is 3.2%. All rates are annually compounded. What is the LIBOR forward rate for the 2- to 3-year period if OIS discounting is used and the OIS zero rates for maturities of 1, 2, and 3 years are 2.5%, 2.7%, and 2.9%, respectively. What is the value of a 3-year swap where 4% is received and LIBOR is paid on a principal of $100 million?