QUESTION 1

Umar Company got considerable loans from finance companies and commercial banks. The loan's interest rate is determined by market rates and is changed every six months. As a result, its cost of borrowing is very susceptible to interest rate swings. Umar aims to grow in the future by expanding its business and through acquisitions, based on its forecast that the Malaysian economy would strengthen. Umar anticipates that it will require significant long-term funding to fund this expansion, and it intends to borrow more funds either through loans or through the issuance of bonds. The corporation is considering issuing stock in the coming year to obtain capital. (15 marks)

a. Explain why Umar should be particularly concerned about future interest rate changes. (3 marks)

b. Based on Umar's projections, do you think the company believes interest rates will continue to rise or fall in the future? Explain. (3 marks)

c. How would this effect the cost of borrowing on existing and future loans if Umar's predictions of future interest rates are correct? (3 marks)

d. Justify why Umar's assumptions for future interest rates may influence when it borrows money and whether it takes out floating-rate or fixed-rate loans. (6 marks