Woolworth has decided to borrow $10,000,000 via floating-rate loan for 3 years. It must decide between two
Question:
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-year 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 the principal to be paid at the end of the 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 |
