Carlos and Wilmsberg Inc. Carlos and Wilmsberg Inc.

is a rapidly growing import-export firm. It decided to borrow €35,000,000 via a euro-euro floating-rate loan for 4 years. Carlos and Wilmsberg Inc. must decide between two competing loan offers from two of its banks.

Caixa Brasilia Federal has offered the 4-year debt at euro-LIBOR + 2.5% with an up-front initiation fee of 2.0%. Brasilao Safra Banco, however, has offered euro-
LIBOR + 3.0%, a higher spread, but 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 0.75%. Carlos and Wilmsberg Inc.’s economist forecasts that the LIBOR will rise by 0.65 percentage points each year. Brasilao Safra Banco, however, officially forecast euro-LIBOR to begin trending upward at the rate of 0.45 percentage points per year. Carlos and Wilmsberg Inc.’s cost of capital is 10%. Which loan proposal do you recommend for Carlos and Wilmsberg Inc.?

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Loan 0 Payments 1 2 3 5 6 Principal $220 Interest Interest rate 12.250% Maturity (years) 6.0 Principal Total (26.950) (23.650) (19.946) (15.788) (26.939) (30.239) (33.943) (38.101) (53.889) (53.889) (53.889) (53.889) (11.120) (5.881) (42.769) (48.008) (53.889) (53.889)