Question

Lluvia and Paraguas. Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating rate​ borrowing, while Paraguas wants the security of fixed rate borrowing. Lluvia is the more creditworthy company. They face the following rate structure.​ Lluvia, with the better credit​ rating, has lower borrowing costs in both types of borrowing.

Lluvia wants floating rate​ debt, so it could borrow at LIBOR+1.000%. However, it could borrow fixed at 9.500%and swap for floating rate debt. Paraguas wants fixed rate​ debt, so it could borrow fixed at 13.500%. However, it could borrow floating at LIBOR+2.000%and swap for fixed rate debt. What should they​ do? (LIBOR is 6.500%​.)

Lluvia’s comparative advantage is __% (Round to three decimal places)

Lluvia’s net interest after a swap with Paraguas is __% (Round to three decimal places)

Paraguas’s net interest after a swap with Lluvia is __% (Round to three decimal places)

Lluvia’s savings on borrowing versus net swap is __% (Round to three decimal places)

Paraguas’s savings on borrowing versus net swap is __% (Round to three decimal places)

Therefore, Lluvia should borrow at the __ rate and Paraguas should borrow at the __ rate.

Answer 1

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