Doreland Corp

Multiple Choice

Doreland Corp. borrowed $3.5 million seven years ago at a floating rate of 5% compounded annual with annual interest payments and principle payable in full at maturity. It also purchased, as part of the loan package, a hedge for $80,000 that limited their rate movement exposure to 2%. Two years after the loan was initiated, interest rates rose by one percent and went up a further one percent, a year later. Rates then stayed the same until 12 months before maturity when they went up by 2%. At the time Doreland took out the loan it chose not to take the alternative of a fixed rate of financing at 7% for the full term of the loan. Ignoring the time value of money, what was the net effect of Doreland's choice of financing compared to locking in a 7% fixed rate of interest?

A) Cost the company $80,000
B) Cost the company $235,000
C) Saved the company $95,000
D) Saved the company $175,000
E) Cost the company $761,158