1. The interest on bond( also called coupon rate) is fixed at the time of its issue.

But interest
rate in the market keeps changing, and,therefore,market price of bond also changes.

2. In india, securitization companies are not allowed to raise funds from retail investors. They
can borrow only from QIBs.

3. What are the different risks that are involved in asset securitization

• Asset risk

• Prepayment risk

• Co-mingling risk

• Bankruptcy risk

• Default risk

4. What are the different credit enhancement techniques in asset securitization

• Seasoning

• Lower Loan to value ration

• Cash toppings

• O ver collaterization

5. Convertible debt conists of a fixed rate bond and a long term call option

6. What are the potential sources of values in LBOs

• Junk bond market

• Leverage and taxes

• Other stakeholders

• Leverage andincentives

• Leverage restructuring

• LBO and lerverage restructuring

7. Zero coupon bonds have no coupons and hence pay no interest. Only payment is face value
at maturity

8. The problem with measures lie RONA, ROI etc are that they ignore the cost of capital

9. APV Formula V(with Equity) = V(All equity) + PV(Tax shield) – PV(Cost of financial distress)
10. WACC method is used to value in LBO, if projects debt to equity ratio is known, whereas APV
method is used if projects level of debt is known

11. Imputed interest expense is equal to the expected price appreciation based o the initial yield

12. Level – I ADRs are traded in i

13. Sources of long term financing overseas are

• ECB – external commercial borrowing

• FCCB – Foreign currency convertible honds

• ADR/GDR

• Asset securitization

14. What are the different instruments that are issued by SPV

• Pass through certificates

• Pay through certificates

• Senior notes

• Junior notes

15. The market price or intrinsic value of a bond is different from the face value if the coupon
rate is different from the market interest rate at that particular time.

16. Market value is equal to PV of all the coupon receipts and redemption value discounted at
the prevailing market rate.

17. Current yield of bond =coupon interest/current market price.

18. ______iiis that discount rate at which all future cash flows equal the present market value.

19. Bond price is ____ iiiproportional to YTM

20. Interest rate elasticity= %age change in price/%age change in YTM

21. A bond holder is a ______ivto the company

22. The rate of return equal to YTM if the __________ v

23. ______viis an offering in which the shares of a company are offered to a limited no of
investors
24. When the market’s nominal annual required rate or return of a particular bond is less than
its coupon rate, then the bond will be selling at vii

25. What factors invalidates the theory of dividend irrelevancy viii

26. Tax clientele effect- ix

27. Return on a stock = capital Gain + Dividend Yield

Dividend Theories

28. Residual Dividend Theory:

 The firm pays a dividend only if it has retained earnings left after financing all profitable
investment opportunities.

 This would maximize capital gains for stockholders and minimize flotation costs of issuing
new common stock.

29. Clientele Effects:

 Different investor clienteles prefer different dividend payout levels.

30. Information Effects:

 Unexpected dividend increases usually cause stock prices to rise, and unexpected dividend
decreases cause stock prices to fall.

 Dividend changes convey information to the market concerning the firm’s future
prospects.

31. Agency Costs:

 Paying dividends may reduce agency costs between managers and shareholders.

 Paying dividends reduces retained earnings and forces the firm to raise external equity
financing.

 Raising external equity subjects the firm to scrutiny of regulators (SEC) and investors and
therefore helps monitor the performance of managers.

32. Expectations Theory:

 Investors form expectations concerning the amount of a firm’s upcoming dividend.

 Expectations are based on past dividends, expected earnings, investment and financing
decisions, the economy, etc.
 The stock price will likely react if the actual dividend is different from the expected
dividend.

33. What is the different between CVR and Earnout – earnout is used when there is information
assymetr. Cvr is used to protect target shareholders from price decline

34. EVA/ Capital = NOPAT/Cost of Capital – Cost of capital

35. Price of Stock P0 = D/r, where D – constant dividend with zero % growth and r – discount
rate, P0 = D/(r-g), where D – initial dividend with growth rate as g

36. Growth rate g = retention rate * ROE

37.

38. Rule 144A (US) allows limited trading of private placement among qualified institutional
investors

39. Sponsored ADR – issuing foreign company pays all legal and financing costs of creating and
trading the security

40. Prepayment risk: potential loss due to full or partial prepayment of the outstanding balance
by borrowers

41. Credit risk: potential loss due to defaults by borrowers in the pool

42. Securitization (of a pool of loans) allocates interest income and principal repayments from
the underlying pool to a prioritized collection of securities notes called tranches.

43. Securitization is an open market selling of financial instrument backed by asset cash flow or
asset value

44. Parties in securitazion – Originator - A company or an organization that has assets

generating cash flows which are used as payment of securities

45. Originator - Sell assets to a special purpose vehicle (SPV) or a trustee to remove the assets
from its balance sheet

46. SPV – Special purpose Vehicle - Purchase assets or receivables from the originator

47. Two types of structure for SPV

• Pass-through

• Pay-through
48. Underwritter bridges cash flows between investors and originators

49. Roles of underwritter

• Indetification of securitization structure

• Pricing of issues

• Placement capacity – optimal issuance size

50. Investors – insurance companies, pension funds, mutual funds and hedge funds

51.

52. PV interest tax shields – Tc * D

53.

54. Share buyback. Can promoters of company participate- SEBI Regulations

• Tender offer and offer through book building – yes

• Buy back through stock exchanges – no

• Promoter or person in control of the company shall not deal in the shares or other
specified securities of the company in the stock exchange during the period, when
buy back is open

55. Break-even EBIT – if EBIT is less than break even EBIT, then adding leverage reduces EPS if
EBIT is higher than break even EBIT, then adding leverage increase EPS

56. Source of snergies

• Operating synergy

• Strategic advantages

• Economies of scope and economies of scale

• Financial synergy

• Tax benefits

• Added Debt capacity – higher debt capacity => lower cost of capital

• Cash slack – when a firm with significant excess cash acquires a firm with
great projects but insufficient capital, the combination creates a value
 • Diversification

57. Four fundamental strategies to improve EVA

• Improve return on existing captail

• Invest as long as return exceeds cost of capital

• Divest if return fail to achieve cost of capital

• Reduce cost of capital by optimizing capital structure

58. In a merger and acquisition deal, _x_ can alleviate asymmetric information problems

59. Termination fee is only for xi

60. Two basic modes of stock payment in MA&A

• Fixed exchange ratio deal

• Floating exchange ratio deal – fixed value dea

61. Fixed exchange ratio deal – target’s payoff is at risk

62. In floating exchange ratio deal – target payoff is fixed and hence there is no risk, however,
the risk of dilution of control exists

63. Fixed collar deal – payoff to target fixed over a range but variable beyond that range.i.e a
floor and ceiling beyond the range

64. Earn out agreement is a financial contract whereby a portion of the purchase price is to be
paid in the future contingent on the realization of the targets future earning

65. UP and OUT CVR – if the average stock price over a measurement period exceeds the
reference price, the CVRs expire

66. ASIAN CVR – Stock price used in computing the payoff from the CVR is averaged over a
certain measurement period

67. What is the difference between Collar and CVR xii

68. Investment opportunities hypothesis in deal structuring

• Acquiring firms with high growth opportunities are more likely to use stock for
acquisition

• Firm prefers to use stock to mitigate over-valuation

69. By identifying the year-end dividend as “extra,” directors hope to ---- xiii
Bond

C – Coupon payment
r- interest rate

F- Face value

C% - Coupon rate

For a zero coupon bond

i
OTC
ii
Yield to Maturity(YTM)
iii
inversely
iv
creditor
v
interest rates do not change during the pendency of bond
vi
Private placement
vii
Premium
viii
Transaction cost, taxes, information asymmetry and agency effects
ix
Higher dividend payout firms owned by lower rate taxpayer
x
Contingent securities
xi
Acquirer of a deal
xii
Collar provides price protection only prior to closing or deal. Cvr provides collar like protectinafter the deal is coumate
xiii
avoid signaling that this is a permanent dividend.