Question

Assume Coles will have surplus cash of​ $50 million by the end of this month. However at the beginning of next​ month, Coles will have to pay​ $100 million to supplies for inventory. This inventory is forecasted to be sold within one month. Select one of the following financial instruments that you think is most appropriate to fund this need.

A. Issue 60 days commerical paper to the value of​ $100 million

B. Issue 30 days commerical paper to the value of​ $50million

C. Issue bonds worth of​ $50 million which has a minimum term of 5 years

D. Raise new share capital and sell it to the public

Answer 1

Option	Answer	Reason
A.	Incorrect	Both amount and days are excess in this option. Coles already have 50 million to fund inventories hence 100 million is not required Further, coles will able to sold the inventory within next 30 days. Thus, only 30 days credit is required instead of 60 days.
B.	Correct	Since coles requires 50 million credit for 30 days. Hence this option is valid.
C.	Incorrect.	50 million is required for 30 days. No use of issuing bond for 5 years. Hence this option is incorrect.
D.	Incorrect.	Share capital is raised for the long term project whereas in this case funds are required for the short term.