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Assignment A
Marks 10
Answer all questions.
Assignment B
Marks 10
Answer all questions.
1. What is Venture Capital? What are the various stages of financing offered and factors to
be taken into account in order to attract Venture Capital?
2. What is a mutual fund? Describe various types of mutual funds. Also describe about
organization, management and regulation of mutual funds.
3. Write short notes on following :
• Credit Rating Agencies
• GDR and ADR
Case Study
ABC Company can purchase a $50,000 piece of equipment by putting 25 percent down
payment and paying off the balance at 10 percent interest with four annual installments of
$11,830. The equipment will be used in your business for eight years, after which it can
be sold for scrap for $2,500. The alternative is that it can lease the same equipment for
eight years at an annual rent of $8,500, the first payment of which is due on delivery.
ABC will be responsible for the equipment's maintenance costs during the lease.
ABC expects that its combined federal and state income tax rate will be 40 percent for
the entire period at issue. Its cost of capital is 6 percent (the 10 percent financing rate
adjusted by your tax rate).
Question:
Please calculate the net cash flows for both lease vs. buying options and suggest which
one should ABC go for and why. Assume that depreciation is computed on the basis of
the 20 percent declining balance method.
Assignment C
Marks 10
Answer all questions.
a) 1 and 2
b) 1, 2 and 3
c) Any of the four criteria
d) All of the four criteria
2. Efforts Ltd negotiated a lease on the following terms: the term of the lease was 5 years;
the estimated useful life of the leased equipment was 10 years; the purchase price was $
60,000; and the annual lease payment was $ 5,000. This lease should be classified as:
a) An Operating Lease
b) A Finance Lease
c) Sale and Lease Back
d) Leveraged Lease
3. The lease analysis should compare the cost of leasing to the
13. Firms that specialize in helping companies raise capital by selling securities are called :
a. Commercial banks
b. Investment Banks
c. Savings Banks
d. Credit Unions
e. All of the above.
14. The sale of a mortgage portfolio by setting up mortgage pass-through securities is an
example of ________.
a. Credit enhancement
b. Securitization
c. Unbundling
d. Derivatives
e. None of the above
15. Corporate shareholders are best protected from incompetent management decisions by
a. Improved management
b. Increased stock price
c. Increased benefits to existing management of taken over firm
d. A and B
e. A, B, and C
a. Globalization.
b. Securitization.
c. Information and computer networks.
d. Financial engineering.
e. all of the above
20. Higher operating leverage is related to the use of additional __________.
a. Fixed costs
b. Variable costs
c. Debt financing
d. Common equity financing
21. __________ lease is a long-term lease that is not cancelable and its life often matches
the useful life of the asset.
a. A financial
b. An operating
c. A net
d. None of the above answers are correct.
22. __________ lease refers to a short-term lease that is often cancelable. For example, a
lease for office space represents this type of lease where the lease life is less than the
useful life of the asset.
a. A financial
b. An operating
c. A net
d. None of the above answers are correct.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
26. A __________ is charged by the lender to hold credit open for the borrower. For
example, if the firm only uses $100,000 of a $200,000 limit, then the firm might pay the
lender $500 for the unused limit in addition to the interest on the amount borrowed.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
27. __________ lease is a lease where the lessee maintains and insures the leased asset
rather than the lessor in a full-service lease.
e. A financial
a. An operating
b. A net
c. None of the above answers are correct.
28. Your firm currently has a current ratio of 1.90 on $9.5 million of current assets. You are
changing the financing mix of your firm and plan on converting financing of $1,000,000 in
a 6-month loan into a 5-year term loan. The purpose of this move is to finance a more
permanent portion of inventories with a longer maturity alternative. If the firm issues the
term loan, new restrictive covenants will require that the current ratio remain at or above
2.00. Should the firm make this change or is there some obvious problem caused by this
proposed change?
a. Yes
b. No, don't make the change; otherwise, the firm will be immediately violating the
new restrictive covenant.
c. No, don't make the change; this type of restrictive covenant is not common on a
term-loan, and you should first try to have this covenant removed.
d. None of the above answers are correct.
29. A __________ represents any restriction imposed on a borrower by a lender and would
be part of the loan agreement.
30. A __________ is a continuously offered debt instrument that is designed to fill the gap
between commercial paper and long-term bonds with maturities currently ranging from 9
months to 30 years and has gained favor from the existence of shelf registration.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
31. A __________ forbids the future pledging or mortgaging of any of the borrower's assets.
a. Negative pledge clause
b. Covenant
c. Loan agreement
d. General routine provision
32. For a company subject to the alternative minimum tax (AMT), __________ is a "tax
preference item," whereas __________ is not. Such a company may prefer to
__________.
33. A __________ allows the borrower to have credit up to some maximum amount over a
specific period, but the notes are usually 90 days and allow the company to renew or
borrow additionally.
a. Term loan
b. Revolving credit agreement
c. Medium-term note
d. Commitment fee
34. Your firm currently has a current ratio of 2.10 on $5 million of current liabilities. You are
financing a $500,000 machine (fixed asset) and $500,000 of additional inventories with a
5-year term loan. Alternatively, the firm can finance the additions with a 6-month loan that
they will need to get approval to renew every six months. Existing restrictive covenants
require that the current ratio remain at or above 2.00. Which alternative will keep the
current ratio above 2.00?
35. With a capital lease, the amount recorded on the asset side of the balance sheet is
__________.
36. Which of the following statements is most correct as it relates to the recording of a capital
lease?
a. The capital lease is shown on the lessee's balance sheet as an asset and amortized
over the asset's useful life.
b. The capital lease is listed as an asset on the lessor's balance sheet and amortized
over lease term.
c. A capital lease is listed as an asset on the lessee's balance sheet and must be
amortized over the lease period.
d. A capital lease is listed as an asset on the lessee's balance sheet and must be
amortized over the asset's useful life.
37. A __________ specifies all of the terms of a loan and the obligations of the borrower.
38. A special purpose vehicle (SPV) raises money by selling __________ where interest and
principal payments are provided by cash flows from a discrete pool of assets.
39. __________ is a long-term, unsecured debt instrument with a lower claim on assets and
income than other classes of debt; while a/(an) __________ bond issue is secured by the
issuer's property.
40. Which of the following statements concerning the rights of common shareholders is
correct, or most accurate?
a. Common shareholders are entitled to a share of the company's current earnings in cash.
b. Common shareholders are entitled to elect the board of directors under a majority-rule
voting system.
c. Because of their preemptive right, common shareholders are entitled to always subscribe
to new common stock so that they can maintain their pro rata interest in the company.
d. Voting by common shareholders can be done either in person at the shareholders' annual
meeting or by proxy.