Question
Raid Gauloises. Raid Gauloises is a rapidly growing French sporting goods and adventure racing outfitter. The company has decided to borrow euro 22 comma 000
Raid Gauloises. Raid Gauloises is a rapidly growing French sporting goods and adventure racing outfitter. The company has decided to borrow euro 22 comma 000 comma 000 via a euro-euro floating rate loan for four years. Raid must decide between two competing loan offers from two of its banks. Banque de Paris has offered the four-year debt at euro-LIBORplus2 % with an up-front initiation fee of 1.800 %. Banque de Sorbonne, however, has offered euro-LIBORplus2.5 % a higher spread, but with 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 3.950 %. Raid's economist forecasts that LIBOR will rise by 0.500 percentage points each year. Banque de Sorbonne, however, officially forecasts euro-LIBOR to begin trending upward at the rate of 0.250 percentage points per year. Raid Gauloises's cost of capital is 11 %. Which loan proposal do you recommend for Raid Gauloises?
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