Question

MICO Automobiles Ltd.' is engaged in manufacturing of auto parts for car manufacturing
companies. The company enjoys good creditworthiness. It now wants to expand its business by
investing in new plant and machinery. For this it requires long terms finance. Arsh, the Finance
Manager of the company advised the CEO of the company to raise funds by issuing equity shares.
It requires huge cost to raise funds by issuing equity shares. To meet the expenses of issuing
shares the company decided to tap the money market.
(a) Name the money market instrument the company can use for meeting the cost to raise the
finance by issuing equity shares.
(b) Differentiate between the two markets referred in the above case on any five bases.
Or
ILM nnontinuous market where​

Answer 1

Answer:

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Answer 2

(a) The money market instrument that MICO Automobiles Ltd. can use is "Commercial paper".

• Commercial paper is a money market instrument. It is used for short-term funds or short-term working capital requirements of a company without requiring huge costs. It is an unsecured promissory note whose maturity period may range from a fortnight to a year. MICO Automobiles Ltd. can use it for bridge financing. Commercial paper is used by large and credit-worthy companies.

• Two markets referred to in the case are "Capital market" and "Money market".

Difference between the "Capital market" and "Money market":-

• Trade period: The period time of money market exchanges is equal to or less than one year whereas the period time of capital market exchanges usually ranges from 3 years to 10 years or even longer.
• Liquidity: Money market instruments have a higher degree of liquidity whereas capital market instruments have a lower degree of liquidity.
• Requirements: Money market instruments are used to fund short-term capital/finance requirements whereas are used for long-term capital requirements.
• Risk: Money market instruments possess lower financial risks as their trading period is short whereas capital market instruments possess higher financial risks as their maturity period is long and they are prone to market/financial trends.
• Rate of return: Money market instruments provide a comparatively lower rate of return on investment whereas capital market instruments provide a higher rate of return on investment due to the longer period of time.