Q1. Using the Mabati Rolling Mills Case Study, explain the various sources of funds as discussed by the management of Mabati Rolling Mills. Give the advantage and disadvantage of each source.
Issue Commercial Papers – It is identified in (Short Term Finance:Commercial Paper, 2008) that a commercial paper is simply unsecured short-term debt instrument issued by an organization for meeting short-term liabilities. An advantage of issuing commercial papers is that only companies with high credit ratings can do so, therefore, a company like MRM can enjoy the prestige with such an issuance. Also it is cheaper than a bank loan as it has low interest rates. However a disadvantage could be that there are no flexibilities with regard to repayments and that it lacks liquidity as it cannot be cashed before the maturity date.
Float Shares in the Market Place – Floating shares can be identified simply as the shares of a public entity that are available for trading in a stock market. An advantage of this source of funds is that the entity gets access to new capital that can be used in developing the business. Although its disadvantage is that the shareholders’ interests may differ from the company’s interest or objective.
Borrow long-term loans from local banks – These are a common way of financing major purchases of an organization. An advantage is that it is directly linked to an organizations operating capacity. Another advantage of long-term loans from local banks is that it enables a firm engage in large projects. Although its disadvantage is that the banks charge high interest rates.
Borrow long-term loans from international banks – Long term loans are usually repaid within three to ten years, although some can exist for more th...
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References
A Basic Guide to Bank-Term Loans. (n.d.). Retrieved from Entrepreneur: http://www.entrepreneur.com/article/52728
Besley, S., & Brigham, F. (2005). Essentials of Managerial Finance. Ohio: South-Western.
Commercial Paper. (n.d.). Retrieved from Cucfa: http://www.cucfa.org/archive/Commercial_Paper_Definition.htm
Dictionary, I. (n.d.). Agency Problem. Retrieved 10 November, 2013, from
http://www.investopedia.com/terms/a/agencyproblem.asp
Harrison, H. (2005, July). To float or not to float? Retrieved from Duport: http://www.duport.co.uk/guides/growing-your-business/to-float.php
Short Term Finance:Commercial Paper. (2008, September 9). Retrieved from College Accounting Coach: http://basiccollegeaccounting.com/2008/09/short-term-financecommercial-paper/
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