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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.

Respuesta :

Answer: See explanation

Explanation:

Alternative 1:

Principal = $30,000,000

Fixed Interest Rate = 5%

Number of Years = 2 Years

Interest Per Year = 5% × $30,000,000

= 0.05 × $30,000,000

= $1,500,000

Interest Cost per year for 1st year = $1,500,000

Interest Cost per year for 2nd year = $1,500,000

2. Alternative 2:

Principal = $30,000,000

LIBOR Rate = 3.5%

Interest Rate will be:

= LIBOR Rate + 1.5%

= 3.5% + 1.5%

= 5%

Number of Days = 6 months = 1m6 × 30 days = 180 Days

Interest Per Year = Principal × (LIBOR Rate/100) × Number of Days in Interest Period

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

= $30,000,000 × 0.05 × 0.5

= $750,000

Interest Cost per year for 1st year = $750,000

Interest Cost per year for 2nd year = $750,000

3. Alternative 3:

Principal = $30,000,000

Fixed Interest Rate = 4.5%

Number of Years = 1 Year

Interest Per Year will be:

= 4.5% of $30,000,000

= $1,350,000

Interest Cost per year for 1st year = $1,350,000

Interest Cost per year for 2nd year = $0

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