Cater enterprises can issue floating-rate debt at LIBOR + 2.50% or fixed rate de

Question

Cater enterprises can issue floating-rate debt at LIBOR + 2.50% or fixed rate debt at 9.50%. Brence Manufacturing can issue floating-rate debt at LIBOR + 4.60% or fixed rate debt at 11.00%. Suppose Cater issues floating-rate debt and Brence issues fixed rate debt. They are considering a SWAP in which Cater makes a fixed rate payment of 6.70% to Brence and Brence makes a payment of LIBOR + 0.00% to Cater.           

a. What are the net payments of Cater and Brence if they engage in the SWAP?   

b. Would Cater be better off if it issued floating-rate debt or if it issued fixed-rate debt and engaged in SWAP?    

c. Would Brence be better off if it issued floating-rate debt or if it issued fixed-rate debt and engaged in SWAP?

Explanation / Answer

received

a. Net payments Borrowing from open market Cater Floating rate LIBOR + 2.50% Brence Fixed rate 11.00% Interest rate swap arrangement Cater Fixed rate 6.70% Brence Floating rate LIBOR + 0.00%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.