what factors would you consider in analyzing these alternatives under what circumsta 556098

Term loans usually require firms to pay a fluctuating interest rate. For example, the interest rate may be set at “1% above prime.” The prime rate sometimes varies by several percentage points within a single year. Suppose that your firm has decided to borrow $40 million for five years. It has three alternatives. It can ( a ) borrow from a bank at the prime rate, currently 10%. The proposed loan agreement requires no principal repayments until the loan matures in five years. It can ( b ) issue 26 week commercial paper, currently yielding 9%. Since funds are required for five years, the commercial paper will have to be rolled over semiannually. That is, financing the $40 million requirement for five years will require 10 successive commercial paper sales. Or, finally, it can ( c ) borrow from an insurance company at a fixed rate of 11%. As in the bank loan, no principal has to be repaid until the end of the five year period. What factors would you consider in analyzing these alternatives? Under what circumstances would you choose ( a )? Under what circumstances would you choose ( b ) or ( c )?

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