Question 2 Noting that there has been an increasing interest in organic foodstuffs with increasing affluence, Mr Tommy Tan is considering starting an organic food retail business in Singapore. He targets to have 8 retail outlets island-wide by end 2021. To maintain its target capital structure, the firm estimates that it will need to borrow $10 million to finance this growth. As the firm is tight on cash, it prefers to repay the loan in full only at the end of 10 years and only wants to service the interest on an annual basis. The firm has approached several banks in the Singapore and 2 banks have signalled interest to be its main financier. JuneBank proposes an annual interest rate of 6.9% and the underwriting spread is 2%. BHR Bank offers the loan at an annual interest rate of 6.5% and the underwriting spread is 2.9%. (a) What is the effective cost of borrowing from JuneBank? (12 markly! (b) What is the effective cost of borrowing from BHR Bank? (12 marks) (c) Using the estimations in (a) and (b), determine the bank that the firm should borrow from. (1 mark) Managing Tommy's Assets Born in Medan, North Sumatra province, on 1 May 1950, Tommy Tan is the oldest of seven boys in his family. His father was an immigrant from Putian city in China's Fujian province. In 1966, Tommy's education was abruptly interrupted after Chinese schools were shut down by then-President Suharto's new regime. He was prohibited from attending national schools due to his parents' Chinese citizenship. When his father suffered a stroke, Tommy was left to run the family business, a small trading business importing all kinds of consumer goods into Indonesia. Noticing that Indonesia exported raw logs for conversion into plywood in countries like Japan or Taiwan, before importing the finished plywood back to Indonesia at great cost, Tommy recognised the opportunity and quickly set his heart on developing his own plywood mill in Indonesia. However, he required a permit to do so. In Indonesia, permits were sought from politicians who often served as army generals. Tommy was forced to work with a general. The general was quickly convinced of the mill's potential after seeing the completed factory and gave his blessings. Tommy knew that his factory would be a huge value-add to Indonesia's economy and would result in the creation of many new jobs. The plant began operations in 1975 after being inaugurated by prominent political leaders. Slowly, from the plywood business, his company branched out into palm oil as well as pulp and paper. In 1997, Tommy elected to settle in Singapore with his family, and also established his company's headquarters in Singapore. Tommy is now one of the most prominent Indonesian Chinese residing in Singapore with an estimated net worth of US$2.8 billion. Despite being aged 70 today, Tommy is still hard at work and running his business empire with the help of his 3 children who have all grown up. Tommy is still constantly looking out for opportunities to grow his business empire and is fully aware of the need to manage and optimise capital so as to maximise his investment returns. Tommy is a self-educated entrepreneur but regrets his interrupted education. He is an advocate of financial management theory and is willing to spend money on professional expertise to help him better manage and grow his business. Tommy has engaged your corporate advisory firm and seeks your inputs on the following financial management problems. Question 2 Noting that there has been an increasing interest in organic foodstuffs with increasing affluence, Mr Tommy Tan is considering starting an organic food retail business in Singapore. He targets to have 8 retail outlets island-wide by end 2021. To maintain its target capital structure, the firm estimates that it will need to borrow $10 million to finance this growth. As the firm is tight on cash, it prefers to repay the loan in full only at the end of 10 years and only wants to service the interest on an annual basis. The firm has approached several banks in the Singapore and 2 banks have signalled interest to be its main financier. JuneBank proposes an annual interest rate of 6.9% and the underwriting spread is 2%. BHR Bank offers the loan at an annual interest rate of 6.5% and the underwriting spread is 2.9%. (a) What is the effective cost of borrowing from JuneBank? (12 markly! (b) What is the effective cost of borrowing from BHR Bank? (12 marks) (c) Using the estimations in (a) and (b), determine the bank that the firm should borrow from. (1 mark) Managing Tommy's Assets Born in Medan, North Sumatra province, on 1 May 1950, Tommy Tan is the oldest of seven boys in his family. His father was an immigrant from Putian city in China's Fujian province. In 1966, Tommy's education was abruptly interrupted after Chinese schools were shut down by then-President Suharto's new regime. He was prohibited from attending national schools due to his parents' Chinese citizenship. When his father suffered a stroke, Tommy was left to run the family business, a small trading business importing all kinds of consumer goods into Indonesia. Noticing that Indonesia exported raw logs for conversion into plywood in countries like Japan or Taiwan, before importing the finished plywood back to Indonesia at great cost, Tommy recognised the opportunity and quickly set his heart on developing his own plywood mill in Indonesia. However, he required a permit to do so. In Indonesia, permits were sought from politicians who often served as army generals. Tommy was forced to work with a general. The general was quickly convinced of the mill's potential after seeing the completed factory and gave his blessings. Tommy knew that his factory would be a huge value-add to Indonesia's economy and would result in the creation of many new jobs. The plant began operations in 1975 after being inaugurated by prominent political leaders. Slowly, from the plywood business, his company branched out into palm oil as well as pulp and paper. In 1997, Tommy elected to settle in Singapore with his family, and also established his company's headquarters in Singapore. Tommy is now one of the most prominent Indonesian Chinese residing in Singapore with an estimated net worth of US$2.8 billion. Despite being aged 70 today, Tommy is still hard at work and running his business empire with the help of his 3 children who have all grown up. Tommy is still constantly looking out for opportunities to grow his business empire and is fully aware of the need to manage and optimise capital so as to maximise his investment returns. Tommy is a self-educated entrepreneur but regrets his interrupted education. He is an advocate of financial management theory and is willing to spend money on professional expertise to help him better manage and grow his business. Tommy has engaged your corporate advisory firm and seeks your inputs on the following financial management problems