Issue floating-rate debt and engage in the swap

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Carter Enterprises can issue floating-rate debt at LIBOR + 2 percent or fixed-rate debt at 10.10 percent. Brence Manufacturing can issue floating-rate debt at LIBOR + 3.0 percent or fixed-rate debt at 11.00 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 7.90 percent to Brence, and Brence will make a payment of LIBOR to Carter.

a. What are the net interest rates 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?

Include each question explanination please.

Reference no: EM131551554

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