Question

Mandaue Foam (MF) is a leading company in the furniture and fixture industry in the country. It has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six (6) months. MF has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It previously purchased Treasury securities that it could sell if it experiences any liquidity problems. If the economy continues to be strong, MF may need to increase its production capacity by about 50% over the next few years to satisfy demand. It is concerned about a possible slowing of the economy because of the potential actions of Bangko Sentral ng Pilipinas (BSP) to reduce inflation. It needs funding to cover payments for supplies. It is also considering issuing stock or bonds to raise funds in the next year. The prevailing commercial paper rate on paper issued by large publicly traded firms is lower than the rate MF would pay when using a line of credit.

Questions:

1. 1. Do you think that MF could issue commercial paper at the prevailing market rate?
2. 2. Should MF obtain funds to cover payments for supplies by selling its holdings of Treasury securities or by using its credit line? Which alternative has a lower cost? Explain.

Answer 1

ANS :Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days.

B ANS :

This final chapter starts by looking at the various forms of "shares" as a means to raise new capital and retained earnings as another source. However, whilst these may be "traditional" ways of raising funds, they are by no means the only ones. There are many more sources available to companies who do not wish to become "public" by means of share issues. These alternatives include bank borrowing, government assistance, venture capital and franchising. All have their own advantages and disadvantages and degrees of risk attached.

Sources of funds

A company might raise new funds from the following sources:

The capital markets:

i) new share issues, for example, by companies acquiring a stock market listing for the first time

ii) rights issues

· Loan stock
· Retained earnings
· Bank borrowing
· Government sources
· Business expansion scheme funds
· Venture capital
· Franchising.