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# Evaluate Swiss Bank Loan vs domestic loan for Poly Pipe acquisition project

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See attached case file.

Evaluate the Swiss bank loan. Evaluate it against what? Well, let's evaluate it against the new domestic bank loan (extension). Now, the key is to determine the effective rate of the Swiss loan versus the domestic bank loan and the terms of each loan with respect to the term of the investment (Poly Pipe).

What could affect the effective rate on the Swiss loan? The rate must be adjusted for currency exchange risk (if you determine such risk exists). How do you determine this? The key lies in the geometric average of the Swiss franc/dollar exchange rates. Appendix D in the case presents the expected exchange rate through 2011. However, the Swiss bank loan is for 10 years (beginning in 2006). Therefore, assume that the exchange rate continues to decline by 1.5% per year from 2012 through 2015.

Ignore any sinking fund provisions and treat the loans as straight, plain-vanilla loans. Simply discounting the periodic principal sinking fund payments by the required rate is too simplistic and valuing a sinking fund loan is beyond the scope of this course.

IN ADDITION TO YOUR QUANTITATIVE ANALYSIS OF THE TWO LOANS, PROVIDE A QUALITATIVE ANALYSIS WITH RESPECT TO THE TERMS OF EACH LOAN TO THE POLY PIPE ACQUISITION PROJECT. ASSUME THE \$10 MILLION DOMESTIC BANK LOAN EXTENSION IS WITH THE POLY PIPE ACQUISITION.

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#### Solution Summary

The solution explains how to evaluate the Swiss bank loan and the domestic loan for Rondo Company

\$2.19