K3 Company wants to borrow $100 million for 5 years. Investment bankers propose to either do a syndicated Eurocredit or issue a Eurobond. The Eurocredit would be denominated in dollars, but the Eurobond would be denominated in different currencies for different markets (these issues are called tranches):
Terms: Syndicated Eurocredit Amount: USD100 million
Up-front fees: USD1.25%
Interest rate: Interest payable every 6 months; LIBOR plus 1.00% Terms: Eurobond
Tranche 1: USD 50 million, Interest rate: 3.50% Tranche 2: ¥5,952 million (equivalent of USD50 million), Interest rate 1.5%
a. What are the net proceeds in USD for K3 for the Eurocredit loan?
b. Assuming that the 6-month LIBOR in USD is currently at 2.00%, what is the effective annual interest cost for K3 for the first 6 months of the loan?
c. Compute an effective annualized interest rate cost (all-in cost) for the USD tranche of the Eurobond.
d. What information would you need to obtain the dollar all-in cost of the yen tranche?
e. What elements would you take into account to choose between the two possibilities?