Carter Enterprises can issue floating-rate debt at LIBOR or fixed-rate debt at 9.9 percent. Brence Manufacturing can issue floating-rate debt at LIBOR + 1.5 percent or fixed-rate debt at 10.5 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 8.90 percent to Brence, and Brence will make a payment of LIBOR + 1 to Carter.
a. What are the net payments of Carter and Brence if they engage in the swap?
b. Will Carter be better off to issue fixed-rate debt or to issue floating-rate debt and engage in the swap?
c. Will Brence be better off to issue floating-rate debt or to issue fixed-rate debt and engage in the swap?