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Question

'Foods India Ltd.’ is a company engaged in the production of packaged juice since 2010. Over this period, a large number of competitors have entered the market and are putting a tough challenge to ‘Foods India Ltd.’. To face this challenge and to increase its market share, the company has decided to replace the old machinery with an estimated cost of Rs.100 crores. To raise the finance, the company decided to issue 9% debentures. The Finance department of the company has estimated that the cost of issuing the 9% debentures will be Rs.10,00,000. The company wants to meet its floatation cost.
(a) Explain the instrument that the company may issue for this purpose.
(b) In which type of financial market, is the instrument explained in (a) above traded ? Also explain how safe the instruments are in this market.

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Solution

(a) To compensate its floatation cost of issuing 9 % Debentures, the finance Manager of “Foods India Ltd.” should issue “Commercial Paper” for this purpose. Commercial Papers are “unsecured promissory note” used to meet the floatation cost, which is used to raise long term funds. These papers were introduced in India for the first time in the year 1990.

(b) Such instruments are traded in the “Money Market” and Commercial Paper is a short term unsecured promissory note. So, it is beneficial for the company to issue such instruments, as no security is required to be provided by the company.


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