BBC (Australia). Botany Bay Corporation (BBC) of Australia seeks to borrow US$30,000,000 in the eurodollar market. Funding is needed for two years. Investigation leads to three possibilities. Compare the alternatives and make a recommendation.

1. Botany Bay could borrow the US$30,000,000 for two years at a fixed 5% rate of interest.

2. Botany Bay could borrow the US$30,000,000 at LIBOR+1.500%. LIBOR is currently 3.500%, and the rate would be reset every six months.

3. Botany Bay could borrow the US$30,000,000 for one year only at 4.500%. At the end of the first year, Botany Bay would have to negotiate for a new one-year loan.

Questions:

1.For Alternative 1, the interest cost per year is $??? for the first year and $??? for the second year.(Round to the nearest dollar.)

For Alternative 1, the certainty over access to capital is: certain/uncertain for the first 6 months, certain/uncertain for the second 6 months, certain/uncertain for the third 6 months, and certain/uncertain for the fourth 6 months.

For Alternative 1, the certainty over the cost of capital is: certain/uncertain for the first 6 months, certain/uncertain for the second 6 months, certain/uncertain for the third 6 months, an certain/uncertain for the fourth 6 months.

Repeat for Alternatives 2 & 3

Only Alternative 1, 2, or 3 has a certain access and cost of capital for the full 2-year period. Alternative 1, 2, or 3 , possessing a lower interest cost in year 1, has no guaranteed access to capital in the second year. Alternative 1, 2, or 3 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 1, 2, or 3 (pick 2)