Sheet1Exhibit I: B.F. Goodrich-Rabobank Interest Rate Swap($ in Millions)Step 1: Determine Comparative Advantage:Option A: BF Goodrich Fixed and Rabobank FloatingOption B: BF Goodrich Floating and Rabobank FixedBF Goodrich Fixed12.50%BF Goodrich FloatingL + 0.5%Rabobank FloatingL + 0.25%Rabobank Fixed (Semi-Annual)10.7%Total CostL + 12.75%Total CostL + 11.2%*BF Goodrich should borrow floating and Rabobank should borrow fixedTotal Savings to be Shared = L + 12.75% - L - 11.2%Total Savings to be Shared =1.55%Step 2: Determine Annual Cost of $125K Fee (on Semi-Annual Yield Basis)Fee Calculation:Time 049.8751-5.5002-5.5003-5.5004-5.5005-5.5006-5.5007-5.500(1+r/2)^2 = (1+x)8-55.500solve for rCost (Annual Yield)11.049%Cost (Semi-Annual Yield)10.759%Less 10.7% Quoted Cost-10.700%Cost of Fee0.059%Step 3: Determine Benefit of Swap to Each PartyNew Debt Issued:Terms: BF GoodrichTerms: RabobankCredit Rating:BBBCredit Rating:AAAAmount$50Amount$50Maturity:8 YrsMaturity:8 YrsCoupons:Semi-annualCoupons:AnnualCoupon Rate:Annual rate = 3 mo. Eurodollar LIBOR + 0.5%Coupon Rate:Fixed at 11%, semiannual equivalent YTM = 10.7%Alt Cost of 8 Yr Fixed Rate Debt: 12-12.5%Alt Cost of 8 Yr Float Rate Debt: L + 0.25% - L + 0.375%L-xL-x< < < < >>>>>>>>>>>>>>>>>>>>>>>|10.7+f+0.0610.70%|||| L+0.5 to Bondholders| 10.7% Fixed to BondholdersOutside Fixed Cost: 12.5%Outside Floating Cost: L +0.25%Interest Rate Swap:BF Goodrich:Rabobank:Pay L+0.5% coupon payments semiannually on domestic debtPay 11% coupon payments annually on Eurobond debt (10.7% semiannual equivalent YTM)Pay Morgan $5.5M annually, $125K initial fee and an annual fee of "f"Pay Morgan semiannual payments of L - xReceive semiannual payments of L-x to cover its coupon payment obligationsReceive $5.5M annually to cover its coupon payment obligationsCost to BF Goodrich:Cost to Rabobank:CF to Morgan:CF to Bondholders:-(L + 0.5%)CF to Bondholders:-10.7%CF from BF:10.7% + f + 0.06% - (L-x)CF to Morgan:-10.7% - f - 0.06%CF to Morgan:-(L-x)CF from Rabo:(L-x) - 10.7%CF from Morgan:+(L-x)CF from Morgan:+10.7%Total Cost = -(L+0.5%) - 10.7% - f - 0.06% + (L-x)Total Cost = -10.7% - (L - x) + 10.7%Total to Morgan =0.06% + fIf Fixed Cost = 12.5%:If Floating Rate = L + 0.25%:Annual fee for similar swaps = 8 - 37.5 bpThen: -(L+0.5%) - 10.7% - f - 0.06% + (L-x) < -12.5%Then: -10.7% - (L-x) + 10.7% < -(L + 0.25%)or 0.08-.375%.-L - 0.5% - 10.7% - f - 0.06% + L - x < -12.5%-(L-x) < -(L+0.25%)If f = .375%-0.5% - 10.7% - f - 0.06% - x < -12.5%x > -0.25%then, total fees to Morgan = .375% + 0.06% = 0.435%-11.26% - f - x -0.25%If Fixed Cost = 12.5%Then: f+x < 1.24%If Float Cost = L + 0.375%Then: x > -0.375%If Fixed Cost = 12%Then: f+x < 0.74%Suppose:f =0.38%x =0.25%Savings to BF Goodrich:0.61%Savings to Rabobank:0.50%Profit to Morgan:0.43%Total Savings1.55%