Question

Botany Bay Corporation​ (BBC) of Australia seeks to borrow US$ 30 comma 000 comma 000 in the eurodollar market. Funding is needed for two years. Investigation leads to three possibilities. Compare the alternatives and make a recommendation.

1. Botany Bay could borrow the US$ 30,000,000 for two years at a fixed 5 % rate of interest.

2. Botany Bay could borrow the US$ 30,000,000 at LIBORplus1.500 %. LIBOR is currently 3.500 %​, and the rate would be reset every six months.

3. Botany Bay could borrow the US$ 30,000,000 for one year only at 4.500 %. At the end of the first​ year, Botany Bay would have to negotiate for a new​ one-year loan.

For Alternative​ 1, the interest cost per year is ​$ blank for the first year and ​$ blank for the second year.

For Alternative​ 2, the interest cost per year is ​$ blank for the first year and ​$ blank for the second year.

For Alternative​ 3, the interest cost per year is ​$ blank for the first year and ​$ blank for the second year.

Answer 1

1. For Alternative 1

Principle Amt = $30,000,000

Fixed Rate of Interest = 5%

Number of Years = 2 Years

Interest Per Year = 5% of $30,000,000 = $1,500,000

Interest Cost per year = $1,500,000 for the first year

Interest Cost per year = $1,500,000 for the second year

2. For Alternative 2

Principle Amt = $30,000,000

LIBOR Rate = 3.5%

Interest Rate = LIBOR Rate + 1.5% = 3.5% + 1.5% = 5%

Number of Days = 6 months = 180 Days

Interest Per Year = Principle * (LIBOR Rate/100) * No of Days in Interest Period

Interest per Year = $30,000,000 * (0.05) * (180/360) = $750,000

Interest Cost per year = $750,000 for the first year

Interest Cost per year = $750,000 for the second year

3. For Alternative 3

Principle Amt = $30,000,000

Fixed Rate of Interest = 4.5%

Number of Years = 1 Years

Interest Per Year = 4.5% of $30,000,000 = $1,350,000

Interest Cost per year = $1,350,000 for the first year

Interest Cost per year = $0 for the second year