Final answer:
a. To find the range for the swap rate within which both companies would benefit from the swap, calculate the borrowing costs for each company assuming the swap transaction takes place. b. If Company B wants to borrow fixed-rate funds, it is not possible for B to reduce its cost of borrowing below 4.9%. c. If Company B wants to borrow floating-rate funds, it is possible for B to reduce its cost of borrowing below LIBOR + 1.7%.
Step-by-step explanation:
a. To find the range for the swap rate within which both companies would benefit from the swap, we need to calculate the borrowing costs for each company assuming the swap transaction takes place. For Company B, the borrowing cost would be 3.8% LIBOR + 1.7%. For Company C, the borrowing cost would be 4.3% LIBOR + 1.3%. To find the range, we need to find the difference between the borrowing costs before and after the swap. The range would be between the minimum and maximum values of these differences.
b. If Company B wants to borrow fixed-rate funds, it is not possible for B to reduce its cost of borrowing below 4.9%. This is because the fixed-rate funds carry a 4.9% interest rate, and there are no gains from the inflation rate to reduce the borrowing cost below this rate.
c. If Company B wants to borrow floating-rate funds, it is possible for B to reduce its cost of borrowing below LIBOR + 1.7%. This is because the floating-rate funds are based on the LIBOR rate, which can change over time. If the LIBOR rate decreases, B's borrowing cost would decrease, allowing it to reduce its borrowing cost below LIBOR + 1.7%.