Problem 8.11 Raid Gauloises Raid Gauloises is a rapidly growing French sporting goods and adventure racing outfitter. The company has decided to borrow 20,000,000 via a euro-euro floating rate loan for four years. Raid must decide between two competing loan offerings from two of its banks. Banque de Paris has offered the four-year debt at euro-LIBOR +2.00% with an up-front initiation fee of 1.8%. Banque de Sorbonne, however, has offered euro-LIBOR +2.5%, a higher spread, but with no loan initiation fees up-front, for the same term and principal. Both banks reset the interest rate at the end of each year. Euro-LIBOR is currently 4.00%. Raid's economist forecasts that LIBOR will rise by 0.5 percentage points each year. Banque de Sorbonne, however, officially forecasts euro-LIBOR to begin trending upward at the rate of 0.25 percentage points per year. Raid Gauloises's cost of capital is 11%. Which loan proposal do you recommend for Raid Gauloises? Expected Chg in LIBOR Assumptions Principal borrowing need Maturity needed in years Current euro-LIBOR Banque de Paris' spread & expectation Banque de Paris' initiation fee Banque de Sorbonne's spread & expectation Banque de Sorbonne's initiation fee Values 20,000,000 4.00 4.000% 2.000% 1.800% 2.500% 0.000% 0.500% 0.250%