--%>
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 : FIN3000 Corporate Finance Task

    Task Description Length: 1000-2000 words (up to 500 words above 2000 permitted) Description: • Complete this assignment in groups of 4-5 students. • Maintain a portfolio of financial issues taken from 8 news sources. • Analyse the articles with reference to theory covered in class and h

    		•
  • Q : What is nonlinearity in option pricing

    What is nonlinearity in option pricing model?

    		•
  • Q : Explain definition of put–call parity

    Explain the definition of put–call parity described by Reinach.

    		•
  • Q : Does the book value of the debt

    Does the book value of the debt all the time coincide with its market value?

    		•
  • Q : Compute a company's cost of capital in

    How can we compute a company's cost of capital in emerging nations, particularly when there is no state bond that we could take as a reference?

    		•
  • Q : Define Working capital requirement

    Working capital requirement: Is a financial term known as WCR, which is used to judge the operational liquidity of the business and it is a part of operational capital. A firm in spite of having a good profitability and assets may not have a good liqu

    		•
  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : Problem on optimal capital structure

    XYZ Company has debt/assets ratio 50%, that is too high and it must be at 45% to be optimal. This debt reduction must also reduce the bankruptcy costs by $30 million. At present, XYZ has 5 million shares of common stock selling at $50 each. The tax rate of XYZ is 30%.

    		•
  • Q : Does value of the company increase when

    According to the valuation method depends on tax shields, the value of the company (Vl) is the value of the unleveraged company (Vu) in addition with the value of tax shields (VTS), thus, the higher the interest and the higher the VTS. Therefore, does

    		•
  • Q : NPV and Other Investment Criteria The

    The XYZ Manufacturing Company is considering the below investment proposal. The initial investment is $100,000. It was an expected economic life of 10 years. The net cash flow in the initial year is expected to be $25,000 and annual net cash flow is expected to develo

    		•