BHP needs to raise $100 million to purchase a new iron ore mine. Which of the following securities should BHP NOT use to raise the fund?

Question

BHP needs to raise​ $100 million to purchase a new iron ore mine. Which of the following securities should BHP NOT use to raise the​ fund?

BlackTom AI · Accepted Answer

When considering how a mining company like BHP might raise a large sum for a long-term asset, the key issue is the maturity and purpose of the security.
Option a: Commercial paper. This is short-term unsecured debt usually issued to meet short-term liquidity needs, often with maturities of up to 270 days. Financing a $100 million, long-lived iron ore mine with a near-term instrument would create a mismatch between the asset’s long lifespan and the instrument’s short maturity, making commercial paper the least appropriate choice for this purpose.
Option b: Ordinary share. Issuing common stock is a form of equity financing. It can be used to fund major long-term investments like a mine, and while it dilutes existing shareholders, it aligns with long-term capital needs because there is no fixed repayment schedule.
Option c: None of these. This would suggest that all the listed instruments are equally suitable, which is not accurate given the maturity mismatch discussed for commercial paper.
Option d: Corporate bond. Long-term debt is a standard financing method for large, enduring assets. Bonds provide substantial funding with longer maturities, matching the mine’s expected life and capital plan.
In summary, the main flaw with using commercial paper for a long-term project like purchasing a mine is the short maturity relative to the asset’s life, which creates refinancing and liquidity risks. The other options (equity or long-term debt) are conventional, appropriate ways to fund such an investment.

MCD2170 Foundations of Finance - Trimester 2 - 2025

BHP needs to raise $100 million to purchase a new iron ore mine. Which of the following securities should BHP NOT use to raise the fund?

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MCD2170 Foundations of Finance - Trimester 2 - 2025

BHP needs to raise​ $100 million to purchase a new iron ore mine. Which of the following securities should BHP NOT use to raise the​ fund?

View Explanation

Log in for full answers

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