Q 1.

a) Short-term and/or Medium-term finance refer to funds that are borrowed by an

organization or company for a short period usually less than five years. On the other
hand, Long-term funds are those that are borrowed for a long- period usually five years
or more.
Commercial Banks issue short and/or medium funds because the issued funds are
actually the deposited funds of other clients, hence it is to be returned within a short
time, the initial fund is returned to the client’s account and the interest received is the
profit for the bank.
On the other hand, firms such as insurance companies have policies that cover a very
long period of time e.g. 10 years or lifetime etc thereby allowing them to supply funds for
a longer period of time with the same purpose as banks to receive interests and then
return the amount to the respective account.

b) Mwamba Ltd. Balance Sheet

i) Funds provided by the owners are:
* Ordinary Share Capital
* Retained Earnings

ii) Short-term and Medium-term funds and the Institutions that are likely to
provide them:-
* Bank Overdraft – From Commercial Banks
* Accounts Receivables – These arise from the daily sales of the organization.
* Accounts Payable – This is credit received from creditors in order to continue daily
operations of the company.
* Cash at Bank – The Company’s funds saved in a bank account

iii) Long-term funds and the Institutions that are likely to provide them :-
* 12% Debentures (2018) – From Financial Institutions
* 14% Mortgage (2016) – From a Commercial Bank or Financial Institution (e.g
Housing Finance Company)
* 10% Bank Loan (2012) – From Commercial Banks

Q 2. a)
i) Preference share capital
These are the shares which carry the right to dividend (normally fixed) which ranks for
payment before that of ordinary shareholders; they are a good source of capital since they
are a long source of fund however they come along with the disadvantage of having to
pay fixed dividends regardless of whether the firm makes a profit or a loss.

ii) Retained earnings

For any company, the amount of earnings retained within the business has a direct impact
on the amount of dividends. Profit re-invested as retained earnings is profit that could
have been paid as a dividend, hence this is a drawback. However this fund is readily
available to the firm without having to pay any interests.
iii) Trade creditors
Trade credit is goods bought on credit by the firm for a period between 30-90 days.
The main advantage of trade credit is you have more time to pay the creditor with no
interest. However if the creditors build up to a great extent and the firm is unable to pay
them, the have the right to take control over the firm and declare it under receivership
until their debts are cleared off.

iv) Debentures

This is a form of long term loan that can be taken out by a public limited company for a
large sum and it will be paid back over several years. It is usually borrowed from
specialist financial institutions. Limited companies can issue debentures to the public.
The firm commits itself to repay with interest for up to 25 years. Debenture holders or
suppliers of loan capital have no controlling interest in the Company and the cost of debt
is lower than cost of equity or preference shares as interest is tax deductible. Debentures
hold greater risk because the company could eventually go out of the business hence this
type of investment should be done very carefully.

v) Common shareholders
It is quite beneficial for a firm to have common shareholders as compared to preference
shareholders. This is because they are not entitled to mandatory dividends that are to be
paid to them like the preference shareholders. However the drawback in this case is that
they have voting rights in the firm, thereby allowing them to participate in management
decisions.

b) Difference between Debt and Equity capital with respect to:

Debt capital is the capital that a business raises by taking out a loan. It is a loan made to
a company that is normally repaid at some future date. Equity capital is represented by
funds that are raised by a business, in exchange for a share of ownership in the company.
i) Timing
Debt financing can be either short-term, with full repayment due in less than one year, or
long-term, with repayment due over a period greater than one year.
Equity financing allows a business to obtain funds without incurring debt, or without
having to repay a specific amount of money at a particular time.
ii) Claim on income
The suppliers of debt capital usually receive a contractually fixed annual percentage
return on their loan, and this is known as the coupon rate.

The suppliers of equity capital usually receive proportions of the profits that the business
makes depending on their percentage share of the firm. However if the firm makes a loss,
it is not mandatory that they are paid.
iii) Claim on assets
Debt capital loans are often secured by some or all of the assets of the company, hence if
the loan is not paid; they are entitled to the assets to the extent of the loan and the interest.
However equity capital providers also have a claim on the assets indirectly as they
become part-owners of the business however they are not entitled to make vital decisions
such as purchase/sale of the assets.

iv) Voice in management

Debt capital differs from equity or share capital because subscribers to debt capital do not
become part owners of the business, but are merely creditors, and the suppliers of debt
capital usually receive a contractually fixed annual percentage return on their loan, and
this is known as the coupon rate.

However equity capital is received in exchange of ownership in the business, hence those
who provided the funds in form of equity do have a voice in the management.
c) Distinguish between an operating lease and a finance lease
A finance lease is a lease that is primarily a method of raising finance to pay for assets,
rather than a genuine rental. The latter is an operating lease, i.e a genuine rental.
The key difference between a finance lease and an operating lease is whether the lessor
(the legal owner who rents out the assets) or lessee (who uses the asset) takes on the
risks of ownership of the leased assets. The classification of a lease (as an operating or
finance lease) also affects how it is reported in the accounts.

Q3.
i) Five goals of a business firm:
1. To maximize profits.
2. To maximize market share.
3. To produce goods of the highest quality.
4. To minimize Costs.
5. To give back to the society.

ii) Conflicts that may arise between these goals

• When trying to achieve best quality goods, the firm will have to buy expensive,
high quality raw materials thereby increasing their costs and minimizing their
profits.

• When trying to maximize profits, firms might overcharge their customers thereby
losing on the market share.

• When trying to minimize costs, the firm might purchase raw-materials of low
quality which shall in turn lower their final products’ quality.
Lecturer: Mrs. M. Mbogo

Course: Finance 3010

Time: Tue/Thurs 11.00 am to

12.40 p.m

Assignment One

Name: Sandeep Kumar Attri

ID Number : 629420