Question: Billy Enterprises can issue floating-rate debt at LIBOR + 2 percent or fixed-rate debt at 10.00 percent. Kidd Manufacturing can issue floating-rate debt at LIBOR

Billy Enterprises can issue floating-rate debt at LIBOR + 2 percent or fixed-rate debt at 10.00 percent. Kidd Manufacturing can issue floating-rate debt at LIBOR + 2.95 percent or fixed-rate debt at 10.45 percent. Suppose Billy issues floating-rate debt and Kidd issues fixed-rate debt. They are considering a swap in which Billy will make a fixed-rate payment of 7.95 percent to Kidd, and Kidd will make a payment of LIBOR to Billy.

a. What are the net payments of Billy and Kidd if they engage in the swap?

b. Will Billy be better off to issue fixed-rate debt or to issue floating-rate debt and engage in the swap? Why?

c. Will Kidd be better off to issue floating-rate debt or to issue fixed-rate debt and engage in the swap? Why?

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