Contail-Guidar Corporation Is in Need of a 10-Year Loan for the Upgrading

Contail-Guidar Corporation is in need of a 10-year loan for the upgrading of its production processing equipment in the amount of $18 million. The company has been offered a term loan from its principal bank at LIBOR plus two percentage points (where the London Eurocurrency rate now stands at 5.75 percent) with the stipulation that the firm maintain 15 percent of the loan in an interest-bearing deposit at the bank, earning the prevailing LIBOR rate on this deposit balance. In contrast, Contail's investment banker has suggested as an alternative that a public bond offering be made at an estimated open-market interest rate of 7.35 percent (given Contail's relatively high credit rating) with the $1,000-par value 10-year bonds sold at a net price (after commissions and discounts) of $950 per bond. Which approach would provide the best financing alternative for this company? Please explain your answer, developing a comprehensive list of the advantages and disadvantages of each financing alternative.