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Question

Difficulty: MediumThe Capital Market: Stock Exchange, Securities, and Trading

A manufacturing company requires long-term capital to construct a new assembly plant. Which of the following financial instruments should the company issue in the capital market to raise this capital?

  1. A
    Treasury bills
  2. Cumulative preference sharesAnswer
  3. C
    Commercial papers
  4. D
    Bankers' acceptances

Answer

Cumulative preference shares are the appropriate financial instrument because they are traded on the capital market to raise long-term capital.
Cumulative preference shares represent long-term ownership capital issued in the capital market. They provide long-term funds suitable for capital investment projects such as building a new assembly plant.

Step-by-Step Solution

1
Identify the funding requirement
The company needs long-term funds to finance physical infrastructure (a new assembly plant).
Capital expenditures like building plants require long-term capital market instruments, not short-term money market instruments.
2
Classify the financial instruments by market type
Treasury bills, Commercial papers, and Bankers' acceptances belong to the money market (maturity under 1 year). Cumulative preference shares belong to the capital market (long-term/permanent funding).
Money market instruments finance short-term liquidity, whereas capital market securities finance long-term development and expansion.

Key Concept

Distinction between Money Market and Capital Market Instruments
Estimated Time:1m 0s
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Topics

The Capital Market: Stock Exchange, Securities, and Trading

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