Chap09 Pbms MBF12e

Chap09 Pbms MBF12e - Problem 9.1 Chavez S.A. Chavez S.A., a...

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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 Swiss-Eurobond definitions of interest (day count conventions). From which source should Chavez borrow?
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Problem 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, six-month LIBOR + spread Current six-month LIBOR 3.885% Spread 1.500% Fixed rate, 1 year, then re-fund 4.625% First 6-months Second 6-months Third 6-months Fourth 6-months #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, six-month 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 re-fund 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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Chap09 Pbms MBF12e - Problem 9.1 Chavez S.A. Chavez S.A., a...

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