--%>
Assignment Help - homework help

Problem on financial manager responsibilites

Assume that you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production plant in China, so it needs to take a loan of US$1 million. Bank A offers Yuen Cheong Manufacturing Company the two choices of loan shown below:

i) borrowing cash at 12% per annum, compounded annually
ii) borrowing gold at 3% per annum, compounded annually.

Assume the risk-free interest rate is 9.5% per annum and storage costs are 0.5% per annum, both are expressed with continuous compounding.

Evaluate which loan you should choose from Bank A. Discuss and explain briefly whether the rate of interest on the gold is too high or too low in the relation of rate of interest on cash loan.

E

Expert

Verified

When borrowing is made in gold , the repayment has to be made in the form of gold as per agreed terms. If  100 ounces of gold is borrowed from the bank at 3% per annum, it means that repayment of the gold to the bank  should be 103 ounces. If the gold value increases then the repayment will be at a higher amount apart from the 3% appreciation in the quantity of gold which may be more than the rate of interest on cash loan.  Hence a comparison would be difficult between the two.

Hence if the gold is not expected to have a steep increase then cash loan from the bank should be the ideal choice.

   Related Questions in Corporate Finance

  • Q : Define Credit and Collections Credit &

    Credit & Collections: Usually, credit is stated as the procedure of providing a loan, in which one party transfers wealth to the other with the expectation that it will be re-paid in full plus interest. The definition of collections is connected t

    		•
  • Q : Porters Secondary activities Porter's

    Porter's Secondary activities: 1. Procurement: • Identification process of raw material.• Identification process of identifying probable suppliers.• Process of purchasing and calling quotes. 2. Human Resource management:

    		•
  • Q : Problem on required rate of return

    Tudor Online Publishing Corporation has tax rate of 35%, debt-to-equity ratio of 25%, and has (leveraged) beta 1.25. The riskless rate is 3% and the market return is 12%. Windsor Publishing Company is an all equity company and is in the same business. What is the requ

    		•
  • Q : Explain accurately value bond options

    If the model could not even find bond prices right, how could this hope to accurately value bond options?

    		•
  • Q : What is the expected risk premium on

    You have decided to invest 30 percent in X; 30 percent in Y; and 40 percent in Z. Theprobability of the state of the economy is Boom 25%; Normal 60%; and, Bust 15%. The rateof return for stock X is Boom .20; Normal .15; and, Bust .00. The rate of return for stock Y is

    		•
  • Q : Investors are irrational or naive

    Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naive?

    		•
  • Q : Is net income of a year is doubtful for

    Is the net income of a year money the company made that given year or is this a number whose importance is quite doubtful?

    		•
  • Q : Explain Straddle and Strangle Straddle

    Straddle & Strangle: In the case of shorting butterfly spread, it can be seen that the gains are limited. However, there exists another strategy known as straddle which produces unlimited gains. This strategy benefits when the trader expects that

    		•
  • Q : Finance A middle income worker, with a

    A middle income worker, with a dependent spouse older than the normal retirement age, retired in January 2004. In the year prior to retirement, her gross monthly earnings were $1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her

    		•
  • Q : Problem on annual mortgage payment You

    You just took out a variable-rate mortgage on your new home. The mortgage value is $100,000, the term is 30 years, and initially the interest rate is 8%. The interest rate is fixed for 5 years, after which the time rate will be adjusted according to the prevailing rat

    		•