Mandaue Foam (MF) is a leading company in the furniture and fixture industry in the country. It has obtained substantial loans from finance companies and commercial banks. The interest rate on the loans is tied to market interest rates and is adjusted every six (6) months. MF has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. It previously purchased Treasury securities that it could sell if it experiences any liquidity problems. If the economy continues to be strong, MF may need to increase its production capacity by about 50% over the next few years to satisfy demand. It is concerned about a possible slowing of the economy because of the potential actions of Bangko Sentral ng Pilipinas (BSP) to reduce inflation. It needs funding to cover payments for supplies. It is also considering issuing stock or bonds to raise funds in the next year. The prevailing commercial paper rate on paper issued by large publicly traded firms is lower than the rate MF would pay when using a line of credit.
Questions:
Give the reference please. Thanks.
Yes , MF could issue commercial paper at the prevailing market rate because the commercial paper rate was cheaper than the rate that was paid by MF by using the line of credit. It could be possible to issue commercial paper to fulfill its short term financial needs of MF .
According to me , MF should obtain funds to cover payments for supplies by selling its holdings of treasury securities . It will have lower cost than by using its credit line because treasury securities are the assets of company while if company takes loan then it will have to pay interest on it . It will increase liablities and also the burden of company to pay interest in future. So company should use treasury securities for payments of supplies.
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