Xavier Manufacturing and Zulu Products both seek funding at the lowest possible cost. Xavier would prefer the

flexibility of floating rate borrowing, while Zulu wants the security of fixed rate borrowing. Xavier is the more

credit-worthy company. They face the following rate structure. Xavier, with the better credit rating, has lower

borrowing costs in both types of borrowing.

Xavier wants floating rate debt, so it could borrow at LIBOR+1%. However it could borrow fixed at 8% and swap

for floating rate debt. Zulu wants fixed rate, so it could borrow fixed at 12%. However it could borrow floating at

LIBOR+2% and swap for fixed rate debt. What should they do?