Marites Sales Company is a wholesale machine tool broker that has gone through a recent expansion of its activities resulting in a doubling of its sales. The company has determined that it needs additional P200,000,000 in short-term funds to finance peak season sales during roughly six months of the year. Marites treasurer has recommended that the firm use a commercial paper offering to raise the much needed funds. Specifically, he has determined that a P200,000,000 offering would require 10% interest (paid in advance or discounted) plus a P125,000 placement fee. The paper would carry a six-month (180 day-day) maturity.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
17. Marites Sales Company is a wholesale machine tool broker that has gone through a recent expansion of its activities resulting in a doubling of its sales. The company has determined that it needs additional P200,000,000 in short-term funds to finance peak season sales during roughly six months of the year. Marites treasurer has recommended that the firm use a commercial paper offering to raise the much needed funds. Specifically, he has determined that a P200,000,000 offering would require 10% interest (paid in advance or discounted) plus a P125,000 placement fee. The paper would carry a six-month (180 day-day) maturity.
What is the effective cost of credit?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
