1. Manchester’s expects to need £8m over the next five years to fund a range of...

1. Manchester’s expects to need £8m over the next five years to fund a range of projects set out in its corporate plan. It is proposing to do this by issuing more long-term fixed interest stock on which it would currently have to pay 3.5% per annum interest.

(a) Discuss the possible advantages and disadvantages of raising the £8m in one sum now rather than spread over the next five years according to when funds will be required.

Expert Solution

Advantages of raising the amount in one sum now:

*The city can lock the interest rate now at 3.5% and need not worry about rise of interest rates in future.

*It can economize on issue costs as the issue would be at one go for GBP 8 million.

Disadvantages of raising the amount in one sum now:

*If the interest rates go down in future, the city will not be able to take advantage of it. It will have to pay interest at higher rates.

*There will be excess cash on hand over the five year period which, will not earn 3.5% interest even if deposited in securities. This will mean payment of interest on unutilized funds which would only be partly compensated by the interest earned on deposits of the surplus funds.

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