5) There are several factors behind a decision to do a swap transaction.

The ratings
of a company is influenced by the strength of their operating cash flows. Companies
with better ratings will be able to gain more favorable interest rates and thus reduce
their cost of debt. With lower cost of capital companies can gain the benefit of
increased reputation and investment value which also influences the companys
ratings.

Swap transaction is done to by a company to lower risk while minimizing cost of

capitalconvert floating bank debt to fixed-rate financing (Allard, 2012). Cost of
capital is the cost of the companys capital funding. A company is financed with
equity and debt, thus it is important for it to have a weighted average of its overall
capital, hence the cost of capital. The cost of capital is the overall required return on
the company, so it would appoint on how much the company has to profit in order
to return prior to making real cash. In other words, it represents the minimum return
that the company needs to make.

It is also important for the company because it will help the company to necessarily
estimate the cost of capital to be discounted on the subsequent cash flow for
deriving its business's Net Present Value (NPV). The best output of it would be the
lowest cost of capital possible, because it also maximizes the value of a company. In
conclusion, by conducting the swap, a company will reduce the cost of capital which
will increase the companys value.

Allard, Bryan (2012). Reducing the cost of capital: interest rate swaps. [Online]
Accessed from: http://www.ey.com/ca/en/newsroom/pr-activities/articles/2012-
spring-cost-capital

Urban J. Jermann (2014) Interest Rate Swaps and Corporate Default . [Online]
http://finance.wharton.upenn.edu/~jermann/swappaper.pdf