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

Commercial paper is a short-term, unsecured promissory note with maturities typically up to 270 days, so it is not appropriate for financing a long-lived capital purchase like a mine.

1. Relevant knowledge points and concepts
- Commercial paper: short-term debt instrument (usually ≤270 days), used for working capital/short-term liquidity needs; unsecured and rolled over frequently.
- Corporate bonds: long-term debt; maturities can match the useful life of capital projects (several years to decades).
- Ordinary shares (equity): permanent capital, suitable for funding long-term investments because no fixed maturity.
- Financing principle of maturity matching: long-lived assets should be financed with long-term capital to avoid refinancing risk and cash-flow mismatches.

2. Step-by-step reasoning
- Step 1: Identify the nature of the expenditure. Buying an iron ore mine is a long-term capital investment with economic life measured in many years or decades.
- Step 2: Apply maturity-matching. Use long-term financing (debt or equity) so payments align with project cash flows and reduce refinancing risk.
- Step 3: Evaluate each instrument:
  - Commercial paper: maturity limit (≤270 days). Using it would require continual rollovers or refinancing, creating substantial refinancing and liquidity risk for a large, long-lived asset.
  - Corporate bond: can be issued with multi-year maturities, matching the asset life and stable funding—appropriate.
  - Ordinary shares: provide permanent capital with no maturity—also appropriate.

3. Intermediate factual steps
- Commercial paper’s typical maximum maturity ≈ 270 days—this directly conflicts with the long-term nature of a mine purchase.
- Even though large firms can issue large CP amounts, the maturity mismatch remains.

4. Why the correct answer is correct
Commercial paper’s short-term, unsecured nature makes it unsuitable to fund a $100 million long-term capital asset; it would expose BHP to refinancing risk and cash-flow mismatch.

5. Why other options are incorrect
- Corporate bond: appropriate (long-term match).
- Ordinary share: appropriate (permanent capital).
- None of these: incorrect because one of the listed options—commercial paper—is indeed inappropriate.

Conclusion: The correct choice is b. Commercial paper, which matches the provided answer.

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?Single choice

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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?Single choice

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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?Single choice