Issues floating-rate debt and brence issues fixed rate debt

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Reference no: EM13836253

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?

Reference no: EM13836253

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