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 % points each year. Brasilao Safra Banco, however, officially forecast euro-LIBOR to begin trending upward at the rate of 0.45 % points per year. Carlos and Wilmsberg Inc.’s cost of capital is 10%. Which loan proposal do you recommend for Carlos and Wilmsberg Inc.?