Question

Tesco needs to borrow 10,000,000 euro now for a period of 4 years.

Tesco has a credit risk premium of 2%

currently 3 month Libor is 1.5% for variable rate borrowing

Tesco can currently borrow a 4.7% for fixed rate borrowing for a term of 3 years

Tesco could also borrow a fixed rate of 4.35% for a term of 2 years

Clearly, though, Tesco would need to refinance itself at the end of the borrowing term selected if the term selected was less than 4 years

Based in this information and the zero coupon yield curve what does Tesco need to consider when deciding how to arrange its borrowing based on your calculations

Answer 1

				Beta	Cost of Capital
1 year Beta of Tesco , from finacial websites =				0.77	3.0400%
1 year Beta of Tesco , from finacial websites =				0.79	3.0800%
1 year Beta of Tesco , from finacial websites =				1.02	3.5400%
	Rf=	1.50%	Rp=	2%
borrowing amount	10000000		year =	4
since it is related to zero yield curve so we need not to pay any interest on borrowing
assming for each year Tesco requires 2500000
Tesco can currently borrow a 4.7% for fixed rate borrowing for a term of 3 years
7500000/(1.047*1.047*1.047)	$ 6,534,633.25
so we will use, rate of interest of 1 year for last year
2500000/(1.0304*1.0304*1.0304*1.0304)	$ 2,217,770.53
adding both	$ 8,752,403.78
Tesco could also borrow a fixed rate of 4.35% for a term of 2 years
for first 2 years
5000000/(1.0435*1.0435*1.0435)	$ 4,400,404.95
so we will use, rate of interest of 2 year
5000000/(1.0308*1.0308*1.0308*1.0308)	$ 4,428,660.26
adding both	$ 8,829,065.20
so considering this loan would be costly when we choose for 4.35% for 2 year plan
hence we should go with 4.7% with 3 years and will use floating rate for added year