A partnership operates with assets worth €15 million, but owes €10 million to its bank.

The annual interest on the loan is 10%. The €10 million is repayable in one balloon payment at the end of five years. The partners want to change the partnership into a limited liability company. They recognize that limited liability would be less risky for them, and they think that the benefit of limited liability would be worth €1 million.

Unfortunately, the bank would want to renegotiate the loan, requiring a higher rate of interest. How much additional annual interest is the bank likely to charge on the five-year loan?