BBC (Australia). Botany Bay Corporation (BBC) of Australia seeks to borrow in the eurodollar market.

Funding is needed for two years. Investigation leads to three possibilities. Compare the alternatives and make a

recommendation.

US$30,000,000

1. Botany Bay could borrow the for two years at a fixed rate of interest.

US$30,000,000 5%

2. Botany Bay could borrow the at LIBOR . LIBOR is currently , and the rate would be

reset every six months.

US$30,000,000 + 1.500% 3.500%

3. Botany Bay could borrow the for one year only at . At the end of the first year, Botany Bay would

have to negotiate for a new one-year loan.

US$30,000,000

1. Botany Bay could borrow the for two years at a fixed rate of interest.

US$30,000,000 5%

For Alternative 1, the interest cost per year is $ for the first year and $ for the second year.

(Round to the nearest dollar.)

1

For Alternative 1, the certainty over access to capital is: (1) for the first 6 months, (2) for the

second 6 months, (3) for the third 6 months, and (4) for the fourth 6 months. (Select from t

drop-down menus.)

For Alternative 1, the certainty over the cost of capital is: (5) for the first 6 months, (6) for th

second 6 months, (7) for the third 6 months, and (8) for the fourth 6 months. (Select from t

drop-down menus.)

2. Botany Bay could borrow the at LIBOR . LIBOR is currently , and the rate would be reset

every six months.

US$30,000,000 + 1.500% 3.500%

For Alternative 2, the interest cost for the first six months is $ . (Round to the nearest dollar.)

For Alternative 2, the certainty over access to capital is: (9) for the first 6 months, (10) for th

second 6 months, (11) for the third 6 months, and (12) for the fourth 6 months. (Select from

the drop-down menus.)

For Alternative 2, the certainty over the cost of capital is: (13) for the first 6 months, (14) for

the second 6 months, (15) for the third 6 months, and (16) for the fourth 6 months. (Select

from the drop-down menus.)

3. Botany Bay could borrow the for one year only at . At the end of the first year, Botany Bay would ha

to negotiate for a new one-year loan.

US$30,000,000 4.500%

For Alternative 3, the interest cost for the first year is $ and for the second year is (17) .

(Round to the nearest dollar and select from the drop-down menu.)

For Alternative 3, the certainty over access to capital is: (18) for the first 6 months, (19) for

the second 6 months, (20) for the third 6 months, and (21) for the fourth 6 months. (Select

from the drop-down menus.)

For Alternative 3, the certainty over the cost of capital is: (22) for the first 6 months, (23) for

the second 6 months, (24) for the third 6 months, and (25) for the fourth 6 months. (Select

from the drop-down menus.)

Only Alternative (26) has a certain access and cost of capital for the full 2-year period. Alternative

(27) , possessing a lower interest cost in year 1, has no guaranteed access to capital in the second year.

Alternative (28) has certain access to capital for both years, but the interest costs in the final 3 of 4 periods is

uncertain.

Therefore, depending on the company's business needs and tolerance for interest rate risk, it could choose between

Alternatives (29) . (Select from the drop-down menus.)