Question
Marine Company has obtained a substantial loans from financial institutions in Malaysia. The interest rate charges on these loans is based on market interest rates
Marine Company has obtained a substantial loans from financial institutions in Malaysia. The interest rate charges on these loans is based on market interest rates and shall be adjusted every two months by the financial institutions. Currently, Marine has a line of credit with AC bank for the purpose of short-term financing. Also, Marine is holding Treasury securities that it could sell them if it experiences any liquidity problems. If economy of Malaysia become strong, Marine could increase its sales revenue for about 40% over the next few years to satisfy market demand. It is concerned about a possible slowing of the Malaysia's economy because of potential Malaysia government's actions to reduce inflation. Marine needs funding to pay for its supplies. As such, Marine is considering issuing stock or bonds to increase funds in the coming years. Besides that, Marine could issue commercial paper because the prevailing commercial paper market rate is lower than the interest rate it need to pay when using a line of credit.
(a)Do you think that Marine should issue commercial paper at this prevailing market rate? Explain.
(b)Should Marine obtain funds to cover payments for suppliers by selling its holding of Treasury securities or by using a line of credit? Which alternative has a lower cost? Explain.
(c) Compute the annualized discount rate and investment rate, if Marine is considering to purchase a 90-day Treasury bill for RM5,890 that pays RM6,000 at maturity?
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