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Problem 9.1
Chavez S.A.
Assumptions
Values
Principal borrowing need
$8,000,000
Maturity needed, in weeks
8
Rate of interest charged by ALL potential lenders
6.250%
New York interest rate practices
Interest calculation uses:
Exact number of days in period
56
Number of days in financial year
360
So the interest charge on this principal is
$77,777.78
Great Britain interest rate practices
Interest calculation uses:
Exact number of days in period
56
Number of days in financial year
365
So the interest charge on this principal is
$76,712.33
Swiss interest rate practices
Interest calculation uses:
Assumed 30 days per month for two months
60
Number of days in financial year
360
So the interest charge on this principal is
$83,333.33
Chavez should borrow in Great Britain because it has the lowest interest cost.
Chavez S.A., a Venezuelan company, wishes to borrow $8,000,000 for eight weeks.
A
rate of 6.250% per annum is quoted by potential lenders in New York, Great Britain,
and Switzerland using, respectively, international, British, and the SwissEurobond
definitions of interest (day count conventions). From which source should Chavez
borrow?
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View Full DocumentProblem 9.2
Botany Bay Corporation
#1
Botany Bay could borrow the US$14,000,000 for two years at a fixed 5.375% rate of interest.
Assumptions
Values
Principal borrowing need
$14,000,000
Maturity needed, in years
2.00
Fixed rate, 2 years
5.375%
Floating rate, sixmonth LIBOR + spread
Current sixmonth LIBOR
3.885%
Spread
1.500%
Fixed rate, 1 year, then refund
4.625%
First 6months
Second 6months
Third 6months
Fourth 6months
#1: Fixed rate, 2 years
Interest cost per year
$752,500
$752,500
Certainty over access to capital
Certain
Certain
Certain
Certain
Certainty over cost of capital
Certain
Certain
Certain
Certain
#2: Floating rate, sixmonth LIBOR +
spread
Interest cost per year
$376,950
$376,950
$376,950
$376,950
Certainty over access to capital
Certain
Certain
Certain
Certain
Certainty over cost of capital
Certain
Uncertain
Uncertain
Uncertain
#3: Fixed rate, 1 year, then refund
Interest cost per year
$647,500
???
???
Certainty over access to capital
Certain
Certain
Uncertain
Uncertain
Certainty over cost of capital
Certain
Certain
Uncertain
Uncertain
Only alternative #1 has a certain access and cost of capital for the full 2 year period.
Alternative #2 has certain access to capital for both years, but the interest costs in the final 3 of 4 periods is uncertain.
Alternatvie #3, possessing a lower interest cost in year 1, has no guaranteed access to capital in the second year.
Depending on the company's business needs and tolerance for interest rate risk, it could choose between #1 and #2.
Botany Bay Corporation of Australia seeks to borrow US$14,000,000 in the Eurodollar market. Funding is needed for two years.
Investigation leads to three possibilities. Compare the alternatives and make a recommendation.
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 Winter '11
 NedHill
 Corporate Finance

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