Lluvia and Paraguas. Lluvia Manufacturing andParaguas Products both seek funding at the lowest possible cost.Lluvia would prefer the flexibility of floating rateâ borrowing,while Paraguas wants the security of fixed rate borrowing. Lluviais the more creditworthy company. They face the following ratestructure.â Lluvia, with the better creditâ rating, has lowerborrowing costs in both types of borrowing.
Lluvia wants floating rateâ debt, so it could borrow atLIBOR+1.000%. However, it could borrow fixed at 9.500%and swap forfloating rate debt. Paraguas wants fixed rateâ debt, so it couldborrow fixed at 13.500%. However, it could borrow floating atLIBOR+2.000%and swap for fixed rate debt. What should theyâ do?(LIBOR is 6.500%â.)
Lluviaâs comparative advantage is __% (Round to three decimalplaces)
Lluviaâs net interest after a swap with Paraguas is __% (Roundto three decimal places)
Paraguasâs net interest after a swap with Lluvia is __% (Roundto three decimal places)
Lluviaâs savings on borrowing versus net swap is __% (Round tothree decimal places)
Paraguasâs savings on borrowing versus net swap is __% (Round tothree decimal places)
Therefore, Lluvia should borrow at the __ rate and Paraguasshould borrow at the __ rate.
Lluvia and Paraguas. Lluvia Manufacturing andParaguas Products both seek funding at the lowest possible cost.Lluvia would prefer the flexibility of floating rateâ borrowing,while Paraguas wants the security of fixed rate borrowing. Lluviais the more creditworthy company. They face the following ratestructure.â Lluvia, with the better creditâ rating, has lowerborrowing costs in both types of borrowing.
Lluvia wants floating rateâ debt, so it could borrow atLIBOR+1.000%. However, it could borrow fixed at 9.500%and swap forfloating rate debt. Paraguas wants fixed rateâ debt, so it couldborrow fixed at 13.500%. However, it could borrow floating atLIBOR+2.000%and swap for fixed rate debt. What should theyâ do?(LIBOR is 6.500%â.)
Lluviaâs comparative advantage is __% (Round to three decimalplaces)
Lluviaâs net interest after a swap with Paraguas is __% (Roundto three decimal places)
Paraguasâs net interest after a swap with Lluvia is __% (Roundto three decimal places)
Lluviaâs savings on borrowing versus net swap is __% (Round tothree decimal places)
Paraguasâs savings on borrowing versus net swap is __% (Round tothree decimal places)
Therefore, Lluvia should borrow at the __ rate and Paraguasshould borrow at the __ rate.