The Star Chemical Company wants to finance one of its production plants by borrowing $150 million for five years. Based on its moderate credit ratings, Star can borrow five-year funds at a 10.5% fixed rate or at a floating rate equal to LIBOR 75 bp. Given the choice of financing, Star prefers the fixed-rate loan. The Moon Development Company is also looking for five-year funding to finance its proposed $150 million office park development. Given its high credit rating, Moon can borrow the funds for 5 years at a fixed rate of 9.5% or at a floating rate equal to the LIBOR 25 bp. Given the choice, Moon prefers a variable-rate loan. In summary, Star and Moon have the following fixed and floating rate loan alternatives:
Company Fixed Rate Floating Rate
Star Company 10.50% LIBOR + 75 BP
Moon Company 9.50% LIBOR + 25 BP
Mood has Absolute advantage in Both Markets, while Star has as comparative advantage in the floating rate market. If a total of 0.50% savings have to be split equally between both;
Required:
What is the effective cost to Star & Moon after the interest rate swap assuming that the savings were split equally. Find both effective COSTS to each.
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The Star Chemical Company wants to finance one of its production plants by borrowing $150 million fo...
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