Company a a low rated rm desires a xed rate long term loan, Ask an Expert

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Company A, a low rated rm, desires a xed rate, long term loan. Company A currently has access to oating-rate funds at a margin of 1.2% over LIBOR. Its direct borrowing cost is 13% in the fixed rate bond market. In contrast, Company B, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 11% and floating rate funds at LIBOR + 0.50%.

(a) What's the total cost savings can be realized?

(b) Suppose they(A and B) split the cost savings. How much would A pay for its fixed rate funds? How much would B pay for its floating rate funds?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92086347

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