Carter Enterprises can issue floating-rate debt at LIBOR + 2% or fixed-rate debt at 10%. Brence Manufacturing
Question:
Carter Enterprises can issue floating-rate debt at LIBOR + 2% or fixed-rate debt at 10%.
Brence Manufacturing can issue floating-rate debt at LIBOR + 3.1% or fixed-rate debt at 11%. Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter makes a fixed-rate payment of 7.95% to Brence and Brence makes a payment of LIBOR to Carter.What are the net payments of Carter and Brence if they engage in the swap? Would Carter be better off if it issued fixed-rate debt or if it issued floating-rate debt and engaged in the swap? Would Brence be better off if it issued floating-rate debt or if it issued fixed-rate debt and engaged in the swap?
Step by Step Answer:
Financial Management Theory And Practice
ISBN: 9781439078105
13th Edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt