Question

You are CEO of a tech company, which is a C corporation. Your company’s stock is traded in the NYSE. Your company issued $200 million 10-year investment-grade bonds to public investors two years ago .A month ago, your company issued $50 million 90-day commercial papers. Your company wants to develop a new product. You were told by the operations and marketing managers that the new project is very promising. Your company needs $75 million to finance the project. The finance department suggests three funding options: (1) use the company’s retained earnings, (2) negotiate a 5-year term loan from a bank and (3) issue additional stocks to raise money. You are considering these alternative options.

Which one of the followings is LEAST likely to be an investor of your company’s stock?

a. a mutual fund

b. a hedge fund

c. a private equity fund

d. a household

Which one of the followings is LEAST likely to be an investor of your company’s commercial paper?

.a. a mutual fund

b. a commercial bank

c. a household

d. an insurance company

The market for your company’s commercial paper belongs to the _____, and the market for your company’s bonds belong to the

a. money market, money market as well

b. money market, capital market

c. capital market, money market

d. capital market, capital market as well

Answer 1

1. Option C : A Private equity fund, will be the least interested investor, since they are interested in Controlling interest.Purpose of controlling inerest may not fulfill since it is further issue of shares.  While all other investor interested in regular income or price appreciation.

2. Option C : A household , will be the least interested in commercial paper, since it is short term instrument and have high denomination. Generally mutual fund , banks, insurance companies and pension funds are the buyer of commercial paper while retail investor usually not buy.

3 Option B : Money market , Capital Market , Since commercial paper is short term instrument hence traded at money market while bonds are long term instrument therefore traded at Capital Market.