Chap09-Pbms-MBF12e

AssumptionsValuesPrincipalborrowingneed8,000,000$Maturityneeded,inweeks8RateofinterestchargedbyALLpotentiallenders6.250%NewYorkinterestratepracticesInterestcalculationuses:Exactnumberofdaysinperiod56Numberofdaysinfinancialyear360Sotheinterestchargeonthisprincipalis77,777.78$GreatBritaininterestratepracticesInterestcalculationuses:Exactnumberofdaysinperiod56Numberofdaysinfinancialyear365Sotheinterestchargeonthisprincipalis76,712.33$SwissinterestratepracticesInterestcalculationuses:Assumed30dayspermonthfortwomonths60Numberofdaysinfinancialyear360Sotheinterestchargeonthisprincipalis83,333.33$ChavezshouldborrowinGreatBritainbecauseithasthelowestinterestcost.Problem9.1ChavezS.A.ChavezS.A.,aVenezuelancompany,wishestoborrow$8,000,000foreightweeks.Arateof6.250%perannumisquotedbypotentiallendersinNewYork,GreatBritain,andSwitzerlandusing,respectively,international,British,andtheSwiss-Eurobonddefinitionsofinterest(daycountconventions).FromwhichsourceshouldChavezborrow?AssumptionsValuesPrincipalborrowingneed14,000,000$Maturityneeded,inyears2.00Fixedrate,2years5.375%Floatingrate,six-monthLIBOR+spreadCurrentsix-monthLIBOR3.885%Spread1.500%Fixedrate,1year,thenre-fund4.625%First6-monthsSecond6-monthsThird6-monthsFourth6-months#1:Fixedrate,2yearsInterestcostperyear752,500$752,500$CertaintyoveraccesstocapitalCertainCertainCertainCertainCertaintyovercostofcapitalCertainCertainCertainCertain#2:Floatingrate,six-monthLIBOR+spreadInterestcostperyear376,950$376,950$376,950$376,950$CertaintyoveraccesstocapitalCertainCertainCertainCertainCertaintyovercostofcapitalCertainUncertainUncertainUncertain#3:Fixedrate,1year,thenre-fundInterestcostperyear647,500$??????CertaintyoveraccesstocapitalCertainCertainUncertainUncertainCertaintyovercostofcapitalCertainCertainUncertainUncertainOnlyalternative#1hasacertainaccessandcostofcapitalforthefull2yearperiod.Alternative#2hascertainaccesstocapitalforbothyears,buttheinterestcostsinthefinal3of4periodsisuncertain.Alternatvie#3,possessingalowerinterestcostinyear1,hasnoguaranteedaccesstocapitalinthesecondyear.Dependingonthecompany'sbusinessneedsandtoleranceforinterestraterisk,itcouldchoosebetween#1and#2.Problem9.2BotanyBayCorporation#1BotanyBaycouldborrowtheUS$14,000,000fortwoyearsatafixed5.375%rateofinterest.#3BotanyBaycouldborrowtheUS$14,000,000foroneyearonlyat4.625%.AttheendofthefirstyearAdelaideCorporationwouldhavetonegotiateforanewone-yearloan.BotanyBayCorporationofAustraliaseekstoborrowUS$14,000,000intheEurodollarmarket.Fundingisneededfortwoyears.Investigationleadstothreepossibilities.Comparethealternativesandmakearecommendation.#2BotanyBaycouldborrowtheUS$14,000,000atLIBOR+1.5%.LIBORiscurrently3.885%,andtheratewouldbereseteverysixmonths.ExpectedChgAssumptionsValuesinLIBORPrincipalborrowingneed€20,000,000Maturityneeded,inyears4.00Currenteuro-LIBOR4.000%BanquedeParis'spread&expectation2.000%0.500%BanquedeParis'initiationfee1.800%BanquedeSorbonne'sspread&expectation2.500%0.250%BanquedeSorbonne'sinitiationfee0.000%RaidGauloisesmustevaluatebothloanproposalsunderbothpotentialinterestratescenarios.BanquedeParisLoanProposalYear0Year1Year2Year3Year4Expectedinterestrates&payments:Expectedeuro-LIBOR4.000%4.500%5.000%5.500%6.000%Bankspread2.000%2.000%2.000%2.000%2.000%Interestrate6.000%6.500%7.000%7.500%8.000%Fundsraised,netoffees€19,640,000Expectedinterestcosts-€1,300,000-€1,400,000-€1,500,000-€1,600,000Repaymentofprincipal-€20,000,000Totalcashflows€19,640,000-€1,300,000-€1,400,000-€1,500,000-€21,600,000All-in-costoffundsif:euro-LIBORrises0.500%peryear7.7438%-1206565.946euro-LIBORrises0.250%peryear7.1365%Foundbypluggingin.250%inexpectationsabove.BanquedeSorbonneLoanProposalYear0Year1Year2Year3Year4Expectedinterestrates&payments:Expectedeuro-LIBOR4.000%4.250%4.500%4.750%5.000%Bankspread2.500%2.500%2.500%2.500%2.500%Interestrate6.500%6.750%7.000%7.250%7.500%Fundsraised,netoffees€20,000,000Expectedinterestcosts-€1,350,000-€1,400,000-€1,450,000-€1,500,000Repaymentofprincipal-€20,000,000Totalcashflows€20,000,000-€1,350,000-€1,400,000-€1,450,000-€21,500,000All-in-costoffundsif:euro-LIBORrises0.500%peryear7.0370%Foundbypluggingin.500%inexpectationsabove.euro-LIBORrises0.250%peryear7.1036%TheBanquedeSorbonneloanproposalisactuallylowerall-in-costundereitherinterestratescenario.Problem9.3RaidGauloisesEuro-LIBORiscurrently4.00%.Raid’seconomistforecaststhatLIBORwillriseby0.5percentagepointseachyear.BanquedeSorbonne,however,officiallyforecastseuro-LIBORtobegintrendingupwardattherateof0.25percentagepointsperyear.RaidGauloises’scostofcapitalis11%.WhichloanproposaldoyourecommendforRaidGauloises?RaidGauloisesisarapidlygrowingFrenchsportinggoodsandadventureracingoutfitter.Thecompanyhasdecidedtoborrow€20,000,000viaaeuro-eurofloatingrateloanforfouryears.Raidmustdecidebetweentwocompetingloanofferingsfromtwoofitsbanks.BanquedeParishasofferedthefour-yeardebtateuro-LIBOR+2.00%withanup-frontinitiationfeeof1.8%.BanquedeSorbonne,however,hasofferedeuro-LIBOR+2.5%,ahigherspread,butwithnoloaninitiationfeesup-front,forthesametermandprin