Hello, the professor has posted a problem, along with the completed solution. I need help in understanding how he got the solution.

3. Company B can issue 5 year variable rate debt to the market at LIBOR and can issue fixed rate 5 year debt at 5%. Company A can issue variable rate 3- year debt at LIBOR + 1.5 and fixed rate debt at 6.9%. They have decided to enter a swap where they share the benefits of the swap equally. Set up the swap and show the net cost of debt for the two firms. If the exchange of cash flows is on a quarterly basis, what would be the exchange of cash flows for the first period if the LIBOR is 5% for the period? Notional principle is $50,000,000

Variable rate Fixed Rate

A LIBOR+1.5 6.90%

B LIBOR 5.00%

Difference 1.5 1.90% Difference .40% shared .20% each

SWAP

A Issues debt at LIBOR+1.5

B issues Debt at 5%

A agrees to pay B 6.70% (6.90%-.20%)

B agrees to pay A LIBOR + 1.5

A net = Pays LIBOR+1.5 gets LIBOR+1.5 Pays 6.70% = 6.70%

B net = Pays 5.00% Pays LIBOR + 1.5 gets 6.70% = LIBOR -.20

If LIBOR = 5.00% Quarterly payments

A pays B .067/4*50 = $837,500

B pays to A ((.05+.015)/4) * 50 = $812,500

Net A to B $25,000