--%>
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 capital goods Capital goods :

    Capital goods: Goods employed in producing other goods are termed as capital goods.

    		•
  • Q : Calculating Beta when market

    A company with a market capitalization of $100 million has no debt and a beta of 0.8. What will its beta be after it borrows $50 million (giving that there are no other changes and no taxes)?

    		•
  • Q : Cost of capital You have joined Zurich

    You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information: Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The

    		•
  • Q : Explain Butterfly Spread Strategies

    Butterfly Spread Strategies: In this strategy, there is no limit on the number of options that can be combined to form the butterfly spread. This strategy essentially combines both the bear spread and the bull spread. In this case, options with three

    		•
  • Q : Explain useful properties of

    Explain useful properties of low-discrepancy sequence theory or quasi random number theory.

    		•
  • Q : Why is Split useful Why is Split useful?

    Why is Split useful?

    		•
  • Q : Problem on Corp stocking Cheever Corp

    Cheever Corp stock is selling at $40 a share. Its dividend in subsequent year will be $2 a share and its β is 1.25. Crane Company has similar growth rate as Cheever. The current stock price of Crane is $55 a share, and its dividend this year is $3. The riskless r

    		•
  • Q : Explain usual value of the sales of net

    Does the usual value of the sales and of the net income of Spanish companies have anything to do along with sustainable growth?

    		•
  • Q : What is the sales of the firm The

    The financial ratios of a firm are as follows. Current ratio = 1.33 Acid-test ratio = 0.80 Current liabilities = 40,000 Inventory turnover ratio = 6  What is the sales of the firm?

    		•
  • Q : Financing EBIT problem Rusk Inc needs

    Rusk Inc needs $50 million in new capital that it might obtain by selling bonds at par with coupon of 12% or by selling stock at $40 (net) per share. The current capital structure of Rusk consists of $300 million (face value) of 10% coupon bonds selling at 90 and 10 m

    		•