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Scenario One 1.

. Short term (usually repaid within one year) Medium Term (usually repaid between 1 - 5 years) Medium term bank loans Hire purchase Long Term (repaid between 5 - 20 years)

Trade credit Bank credit Loans and advances Cash credit Overdraft Discounting of bills

Ordinary shares Retained earnings

Customers advances Installment credit Loans from co-operatives


Long-term bank loans / mortages Venture capital Sales and lease back Debentures

2. Definition Equity Financing is money lent in exchange for ownership in a company. New businesses can use equity financing for their startups or when they need to raise additional equity capital to offset existing debt Advantages Equity financing doesn't have to be repaid. Plus, you share the risks and liabilities of company ownership with the new investors. Since you don't have to make debt payments, you can use the cash flow generated to further grow the company or to diversify into other areas. Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the future when needed. Disadvantages By taking on equity investment, you give up partial ownership and, in turn, some level of decision-making authority over your business. Large equity investors often insist on placing representatives on company boards or in executive positions. If your business takes off, you have to share a portion of your earnings with the equity investor. Over time, distribution of profits to other owners may exceed what you would have repaid on a loan.

Dept Financing

refers to any borrowed money which the entrepreneur must pay back to the lending institution. It can come in the form of a loan, line of credit, bond, or even an IOU. An interest rate and other terms apply.

Debt financing allows you to pay for new buildings, equipment and other assets used to grow your business before you earn the necessary funds. This can be a great way to pursue an aggressive growth strategy, especially if you have access to low interest rates. Closely related is the advantage of paying off your debt in installments over a period of time. Relative to equity financing, you also benefit by not relinquishing any ownership or control of the business.

The most obvious disadvantage of debt financing is that you have to repay the loan, plus interest. Failure to do so exposes your property and assets to repossession by the bank. Debt financing is also borrowing against future earnings. This means that instead of using all future profits to grow the business or to pay owners, you have to allocate a portion to debt payments. Overuse of debt can severely limit future cash flow and stifle growth.


Cost of Debt Financing:

The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modeled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous (not linked to the cost of debt). Cost of Equity Financing: The cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity.

4. Short term financing When you start up your new business, a short-term loan is an ideal solution for a quick cash injection into the business without setting yourself up for a long-term debt commitment. It can Medium term financing A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a capital asset, but allows the lessee to use it. The lessee makes payments under the terms of the lease to the lessor, for a specified period of time. The fundamental characteristic of a lease is that ownership never passes to the business customer. Instead, the leasing company claims the capital allowances and passes some of the Long term financing RETAINED EARNINGS is the profit the company keeps and reinvests in the firm. I. This is often a MAJOR SOURCE OF LONG-TERM FUNDS. Retained earnings are usually the most favored source of meeting long-


help you cover initial needs, including equipment, supplies and even wage expenses

benefit on to the business customer, by way of reduced rental charges. The business customer can generally deduct the full cost of lease rentals from taxable income, as a trading expense. The business customer will normally be responsible for maintenance of the equipment. So leasing is most appropriate for the following reason: Working capital will not be depleted because deposit is not required. Asset being leased becomes the 'security' in most cases. Negotiate repayment term up to five years, tailored to cash flow.

term capital needs because: A. The company saves interest payments, dividends, and underwriting fees. There is no dilution of ownership.



The major problem is that many organizations do not have sufficient retained earnings.

Scenario Two

1. Going through the process of constructing a financial plan is a valuable exercise for any business owner. The financial plan, or budget as it is also called, helps guide the day-to-day decision making of the business. Comparing forecast numbers to actual results yields important information about the overall financial health and efficiency of the business.

2. Financial information that is helpful in decision making, including: Profit and Loss accounts providing details of whether the business is making efficient use of financial resources.

Balance Sheet information providing details of a businesses assets and liabilities, as well as the liquidity of the business. Sales and purchases information setting out particular types of trading and accounts with particular customers and suppliers. Information about the purchase of assets and liabilities. Information about the wages paid out by a business. Information about costs.

By providing a steady and up-to-date flow of information, a business is able to make appropriate decisions about:
1. 2. 3. 4. 5.

how to reduce costs how to increase sales how to raise profitability when to purchase new capital assets the best sources of finance, and duration, etc.

3. The main objective of financial planning is that sufficient fund should be available in the company for different purposes such as for purchase of long term assets, to meet day-to- day expenses, etc. It ensures timely availability of finance. Along with availability financial planning also tries to specify the sources of finance.

Scenario Three

Face value= $1,000 interest/year= $125 years to maturity = 15 years current yield =14%

BV= C [1-1/(1+r)t ] / r + F/ (1+r)t

Calculate the present value of the face value

= $1,000 /(1.14)15 = $1,000 / 7.1379 = $140.097 Calculate the present value of the coupon payments

= $125 [1 - 1/(1.141)15]/.14 = (125 x0.859903)/0.14= $676.77 The value of each bond = $676.77+ 140.097= $907.8675

Scenario four For the first 18 years

25000 = P (1 + 9%/12) 18*12 ----- P=25000/(1.0075)216 = 4980

Per month over the 18 years = 4980 18 12 = $ 23 For each of the following 3 years

25000 = P ( 1 + 9%/12)1*12 = 22935 / 12 = 1911 (per month for 3 yrs) Scenario - five The formula as following: NPV (without investment)= earnings per share X (number of shares)/ Discount rate NPV= 2(200,000)/.15 = $2,666,667 NPV (with investment) calculation:


=- investment opportunity cost + expected earning (discount rate - un invested rate) X discount rate

NPV (with investment)=

XXX 1+ Discount rate

NPV = [-2,000,000+330,000/(.15-.75(.15))] /1.15 = $5,913,043