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What are their effective financing costs

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Question - The followings are the borrowing rates of Firm A and B in the fixed-rate and floating rate markets:

 

Firm A

Firm B

Fixed-rate

4.5%

7.0%

Floating rate

LIBOR+0.5%

LIBOR+1.9%

Because of the nature of their business, Firm A needs to secure effectively floating-rate financing, while Firm B needs to secure effectively fixed-rate financing. Can we arrange an interest rate swap between Firm A and B that can lower their financing costs while at the same time satisfying their respective financing needs? If yes, outline the terms of an interest rate swap that can equally split the total savings in financing costs between the two firms. What are their effective financing costs with the use of the swap? You need to explain how you arrive at your answers.

Reference no: EM133056675

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