Woolworth has decided to borrow $10,000,000 via floating rate loan for 3 years. It must decide between two competing loan offerings from two banks: CBA has offered the three-years loan at LIBOR+1.5% with an up-front initiation fee of 1%. Westpac bank however, has offered LIBOR+3%, but with no initiation fees up-front, for the same term and principal. Both banks reset the variable rates at the end of each year. LIBOR is currently 3.5% and Woolworth financial advisory forecasts that LIBOR will rise by 0.25% per year. All interest will be paid at the end of each year and principal to be paid at the end of term contract. Woolworth's cost of capital(WACC) is 6%. Fill up the following the forecasted cash flows for both loan offers and advise on the better alternative: Bank Year 0 Year 1 Year 2 Year 3 CBA Westpac S Which loan proposal do you recommend for Woolworth :
Woolworth has decided to borrow $10,000,000 via floating rate loan for 3 years. It must decide between two competing loan offerings from two banks: CBA has offered the three-years loan at LIBOR+1.5% with an up-front initiation fee of 1%. Westpac bank however, has offered LIBOR+3%, but with no initiation fees up-front, for the same term and principal. Both banks reset the variable rates at the end of each year. LIBOR is currently 3.5% and Woolworth financial advisory forecasts that LIBOR will rise by 0.25% per year. All interest will be paid at the end of each year and principal to be paid at the end of term contract. Woolworth's cost of capital(WACC) is 6%. Fill up the following the forecasted cash flows for both loan offers and advise on the better alternative: Bank Year 0 Year 1 Year 2 Year 3 CBA Westpac S Which loan proposal do you recommend for Woolworth :
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 17P
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Transcribed Image Text:Woolworth has decided to borrow $10,000,000 via floating rate loan for 3 years. It must decide between two competing loan offerings
from two banks:
CBA has offered the three-years loan at LIBOR+1.5% with an up-front initiation fee of 1%. Westpac bank however, has offered LIBOR+3%,
but with no initiation fees up-front, for the same term and principal. Both banks reset the variable rates at the end of each year. LIBOR is
currently 3.5% and Woolworth financial advisory forecasts that LIBOR will rise by 0.25% per year. All interest will be paid at the end of
each year and principal to be paid at the end of term contract. Woolworth's cost of capital(WACC) is 6%. Fill up the following
the forecasted cash flows for both loan offers and advise on the better alternative:
Bank
Year 0
Year 1
Year 2
Year 3
СВА
Westpac $
Which loan proposal do you recommend for Woolworth :
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