Carter Enterprises can issue floating-rate debt at LIBOR +2 percent or fixed-rate debt at 10.00 percent. Brence Manufacturing can issue floating-rate debt at LIBOR +3.1 percent or fixed-rate debt at 11 percent.
Suppose Carter issues floating-rate debt and Brence issues fixed-rate debt. They are considering a swap in which Carter will make a fixed-rate payment of 7.95 percent to Brence, and Brence will make a payment of LIBOR to Carter.
What are the net payments of Carter and Brence if they engage in the swap? Will Carter be better off to issue fixed-rate debt or to issue floating-rate debt and engage in the swap?
Will Brence be better off to issue floating-rate debt or to issue fixed-rate debt and engage in the swap?