Case Study:

ABC Company is med-sized company whose credit-rating in the market is average (Single A, according to S&P rating). The company is willing to finance a project whose cost is around QR 100 million and to be repaid over the next 10 years (Fixed Payment Loan). As the company rating is average, it can borrow from the bank at the average cost of borrowing which ranges from 5% to 7.5% or it can sell 10-year bonds at par, face value of each is QR 10,000, annual coupon payment is 5.8%. If the bonds advertising cost and cost of other listing requirements is QR 1.25 million to be repaid at the end of the first year. For sure, the firm thinks of the alternative that is cheaper and feasible in the light of its financial creditworthiness.

Case Requirements

1. What are the available sources to raise for funds for a typical Qatari company? Can you categorize these sources in a logical way?
2. What are the advantages and the disadvantages of the main sources of funds for a typical Qatari Company that you raised in the previous answer?
3. Suppose the cost of borrowing from banks is 6% based on the creditworthy of the borrower, while from financial Markets is around 5.80% without listing and issuing cost. Which is better for the ABC company to borrow from banks or to sell bonds on the markets based on the cost of each source and in the light of the data provided above? Attach the Excel sheet that shows your detailed calculations and the steps of calculations.
4. Explain in detail the reason for taking your decision in Question 3? Furthermore, raise other factors, which might deter the decision from choosing the source of funds indicated in Question 3?)

Answer rating: 100% (QA)

1The Sources Available to raise funds are aTake a loan of 100 million from bank which is to repaid in the next 10 years at an interest rate ranging be... View the full answer