Managing Financial Resources And Decisions

Managing Financial Resources and Decisions
Executive summary This report is to propose an appropriate capital structure for Xpresso Delight
Limted's business expansion with the minimum amount of capital as US$ 30 million. In order to
achieve that goal, firstly, it is going to identify the sources of finance available for the business as
debt financing which include loans, debentures and bonds; and equity financing, which includes
common shares, preference shares and retained profit. It is also to discuss advantages &
disadvantages of each source, as well as to assess the implications of these different sources related
to risk, legal, financial and dilution of control and bankruptcy. Based on those analyses, it is to
select the appropriate sources of finance for the ... Show more content on Helpwriting.net ...
Therefore, there are two principal sources of finance available to Xpresso Limited including debt
and equity financing. 4.1.1. Debt financing: In regards to debt financing, the simplest meaning is
borrowing money on credit with a promise to repay the amount borrowed, plus interest18. There are
many types of debt financing, including borrowing from banks in terms of loans; or borrowing from
investors in terms of debentures, bonds 4. 4.1.1.1. Loans: A loan is a financial transaction in which
one party – the lender – agrees to give another party – the borrower an amount of money which
must be paid back in full16. With a good finance profile and the support of Vietnam government
pro–business policies, it is easier for Xpresso Limited to borrow from commercial banks such as
Vietcombank, VietinBank and so on. For example, the supportive interest rate of loans in Vietnam at
present is fluctuating between 5 and 6 percent per year14, therefore if Xpresso Limited. borrows
US$ 10,000, the interest it has to pay back will be between US$ 500 and US$ 600. 4.1.1.2.
Debentures: It is a channel for Xpresso to mobilize capital from investors setting out the terms of
loans, backed by its reputation but not collateral12. Investors can be individuals, Vietnam and
foreign
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Sources Of Finance : The Statement Of Financial Position
Identified sources of finance in the statement of financial position Debenture A debenture is the
most common form of long term loan that can be taken by Humbro. Debentures are usually loans
that are repayable on a fixed date this is in the statement of financial position under the heading
Non–current liabilities (8,000) in both 2011 and 2012. Most debentures pay a fixed rate of interest
which you can also see in the statement of financial position under current liabilities titled debenture
interest (800) for year 2011 and 2012. The main advantage of a debenture to companies is the fact
that they have a lower interest rate than overdrafts. They are usually repayable at a date far off in the
future. Retained earnings Retained earnings are profits generated by a company that are not
distributed to shareholders as dividends but are either reinvested into the business or kept as a
reserve for specific objectives these being to pay off debt or purchase a capital asset. As you can see
in Humbros statement of financial position under capital and reserves they have retained earnings at
9,100 in 2011 and 10,500 in year 2012 this has shown an increase which means there is more capital
available for growth and higher returns on investments and shareholder equity. Ordinary shares
Ordinary share are any shares that are not preference shares and do not have any predetermined
dividend amounts. An ordinary share represents equity ownership in a company and entitles the
owner to a

Ch02 Sm Leo 10e
Solutions Manual to accompany Company Accounting 10e prepared by Ken Leo John Hoggett John
Sweeting Jeffrey Knapp Sue McGowan © John Wiley & Sons Australia, Ltd 2015 Chapter 2 –
Financing company operations REVIEW QUESTIONS 1. Explain the nature of a share. Distinguish
between an ordinary share and a preference share. Basically, a share represents ownership of a
portion of the share capital of a company. Also note the discussion in Chapter 1 of the text
concerning the relationship between limited liability and the amount paid up on a share. The
differences between ordinary and preference shares are determined by the terms of issue. A
company has the right to issue preference shares, but may only do so either if there is a ... Show
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If the share issue is fully subscribed, the underwriter will collect the commission and not have to do
anything. 4. If a share issue is oversubscribed, what action can be taken in relation to excess money
received on application? Excess monies received on application for shares will be refunded to the
applicant. However where shares are issued on a partly paid basis, the excess can be used as an
offset in reducing allotment money due and in payment of any future calls, provided the company's
constitution and the terms of the prospectus allow for this treatment. 5. When can a company forfeit
its shares? What happens to money already paid by the holder of those shares? A company can
forfeit its shares provided the rules for forfeiture are in the company's constitution. The rules usually
specify that shares would be forfeited for non–payment of calls. Where shares are forfeited, the
company can, depending on the constitution, retain the funds already paid on the forfeited shares in
which case the Forfeited Shares account will be considered a reserve and part of equity.
Alternatively, the forfeited shares can be reissued and the amount received, less the costs of
forfeiture and reissue of shares, may then be refunded to the former shareholders. In this case, the
Forfeited Shares account is a liability. 6. How should a company account for the legal costs of
formation? Should the accounting treatment be the same as that for underwriting and other share
issue

Higher National Diploma
INTRODUCTION As we are aware, finance is the lifeblood of business or it can be said as the most
important part of all the business enterprises. To understand finance, you need to know the entire
business indeed. Finance can be used for various reasons like expanding the business, investing and
purchasing fixed assets like land and building, machinery so on. In order to survive in this
competitive world every organisation need to have a good strength of finance available to their
business or else they won't be able to survive in this world. Hence, it is very important to select the
correct sources of finance available to the company. Finance can be in two types' external sources or
internal sources. TASK ONE 1. SOURCES OF FINANCE ... Show more content on
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This is a common method of financing a start–up. The founder provides all the share capital of the
company, retaining 100% control over the business. The advantages of investing in share capital are
covered in the section on business structure. The key point to note here is that the entrepreneur may
be using a variety of personal sources to invest in the shares. Once the investment has been made, it
is the company that owns the money provided. The shareholder obtains a return on this investment
through dividends (payments out of profits) and/or the value of the business when it is eventually
sold. A start–up company can also raise finance by selling shares to external investors – this is
covered further below. 1.2 External sources * Loan capital This can take several forms, but the most
common are a bank loan or bank overdraft. A bank loan provides a longer–term kind of finance for a
start–up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the
rate of interest and the timing and amount of repayments. The bank will usually require that the
start–up provide some security for the loan, although this security normally comes in the form of
personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in

What Are Debenture?
QUESTION 2 (a) What are the effect of pre incorporation contrast according to common law and
the Malaysian Companies Act 1950? Explain the cases relevant to the aforesaid matter.
Introduction
Often promoters of companies try to enter into contracts on behalf of proposed corporations in order
to secure the contract before the time for incorporation or to confirm the contracts for the
corporation before the expense of incorporation is incurred. Normally the promoter does not have
any intention of being personally liable on the contracts. In some cases the promoter is aware that
the corporation has not been incorporated but the person dealt with is not aware that the corporation
has not been incorporated. In other cases neither the ... Show more content on Helpwriting.net ...
However, the promoters did not receive a certificate of incorporation for the Gravesend Royal
Alexandra Hotel Company Limited until February 20, 1866. The directors then purported to ratify
the agreement again on April 11, 1866 just days before the company made an assignment in
bankruptcy. The court held that the ratification of February 1, 1866 was not a valid ratification
because the company was not in existence at the time. The ratification on April 11 was also held not
to be a valid ratification because of the requirement that a ratification can only be done by a
principal having capacity to contract at the time the contract was entered into as well as at the time
of the ratification. It was also not valid on the basis that the company was not in existence at the
time of the promoters purported to act on its behalf. The court nonetheless still felt there was clearly
an intended contract and the only way in which there could be a valid contract was if the defendants
were the other contracting parties. They thus held that there was a valid contract in which the
plaintiffwas one party and the defendants were the other parties. Kelner v. Baxter thus confirmed
that a company cannot ratify a contract, or purported contract, entered into on its behalf if the
company was not in existence at the time a person purported to enter into a contract on its behalf.
Kelner v. Baxter

The 1956 Act 1956: The Companies Act, 1956
The Companies Act, 1956 is the most important legislation in India that gives Central Government
power to regulate the formation, financing, functioning and winding up of companies. The 1956 Act
empowers the Central Government with the right to do the following:
a. Inspect the books of accounts of the company
b. Direct special audits and order investigations into the affairs of the company
c. Launch a prosecution in case of violation of the 1956 Act
The terms merger or amalgamation have not been defined in the 1956 Act, though this voluminous
piece of legislation contains 69 definitions in Section 2. The concept paper recently issued by the
Ministry of Company Affairs, the fate of which is still unknown, contained 100 such definitions but
still stopped short of defining merger or amalgamation. The terms merger and amalgamation are
synonyms and the term 'amalgamation', as per Concise Oxford Dictionary, Tenth Edition, means, 'to
combine or unite to form one organization or structure'.
The provisions relating to merger and amalgamation are contained in sections 391 to 396A in
Chapter V of Part VI of the 1956 Act. Any proposal of amalgamation or merger begins with the
process of due diligence, as the proposal for merger without ... Show more content on
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An arrangement may also involve debenture holders being given an extension of time for payment,
releasing their security in whole or in part or exchanging their debentures for the claims and the
balance in shares or debenture of the company; preference shareholders giving up their rights to
arrears of debenture of the company; preference shareholders giving up their rights to arrears of the
dividends, further agreeing to accept a reduces rate of dividend in the future,

Mci Communocations
MCI COMMUNICATIONS CORPORATION
Introduction
In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one
of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In
this case the financial impact of this increased competition will be analyzed.
Analysis of External Financing Needs for MCI from 1983 to 1989
Please see Exhibit 1 and Exhibit 2 MCI's external needs will keep increasing over the next few years
as the operating margins would shrink because of higher competition & higher access charges. In
order to increase its market share, MCI would need to continue investing huge capitals in its
network. As per exhibit 9 of the case, it is anticipated that MCI will ... Show more content on
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o Please see Exhibit 3. (b) $500 million of 12.5% 20 year subordinated debentures –
o Cost of debt in this case is 12.5% though MCI can raise $ 100 million more with this option in
comparison to option (a) above. Servicing this debt would be a significant drain on the cash flow. o
Please see Exhibit 3. (c) $600 million Convertible offering @ 7.625% 20 year with conversion at 54
per share o Using this option MCI can raise $ 100 million more than option (b) at 4.88% lower rate
of interest. It also gives MCI an option to convert it to equity once the stock price reaches 54 (it is
currently 47). Based on previous convertible offerings (As per exhibit 6 of case, 1978, 1979, 1980,
1981 and 1982), MCI has been converting it to equity within 18 months because of its high growth.
As higher growth is projected for the next few years (Exhibit 9 of case), MCI is expected to convert
this $600 million offering to equity, thereby reducing its leverage. o This option allows to finance its
current activities and match capital inflows with expected investment outlays in the near future. It
also allows MCI the option to eliminate the cash flow drain from servicing the debt once the stock
price increases. o As per Exhibit 3 attached here, this offering will provide capital to meet the
external financing needs for 1983.
3/4
Recommended Financing Alternative
(d) $1 billion 10 year debenture @ 7.5% with 18.18 warrants at $ 55 exercisable until 1988.

Mci Case Report
Financial Strategy for Corporation
Case3
MCI Communications Corp., 1983
Estimation of external financing MCI requires until the end of 1987
MCI is the second–largest long–distance provider in the telecom industry of United States after
AT&T. First of all, in this case we estimate external financing MCI requires until the end of
1987. Exhibit 9A provides the projected capital investment needs for the following year, so our
group plug those data in Exhibit 3 corresponds to Funds from Operations and Use of Funds, then
come up with the External Financing MCI needs from 1984 to 1987 by deducting the total Source
from the total Use. By looking at each year's needs, we noticed that the external ... Show more
content on Helpwriting.net ...
This better capital structure would be making it easier for MCI to raise capital in the future.
Analysis of outlook for MCI
MCI would be better to keep its capital structure of 55% debt. The cost of equity is high because
raising more equity will dilute the value for existing shareholders. Due to the fact that MCI has a
high leverage, it is not feasible to issue debt. Additionally, MCI has exhausted the line of credit from
the banks and used convertible debentures frequently. MCI belongs to a competitive and regulatory
industry. The high leverage will limit its potential to grow. In exhibit 8, MCI does not have a bond
rating. The convertible bond allowed the company to raise capital and convert to equity later. The
interest coverage ratio of AT&T is 3.6X whereas that of MCI is 4.2X. After increasing the
market share, the company can obtain a bond rating by decreasing its financial leverage.
Three different financing alternatives a. Debt issue:
If MCI wants to issue $500 million of 20–year subordinated debentures, we first calculate the
interest payment, which is $62.5. The total interest payment would be $116.6 by adding up the
previous net interest, so we can calculate the interest coverage ratio by dividing the operating
income in 1983 by the total interest payment, which is 2.53. Then we look up the

Mid-Texas Healthcare System: A Case Study
A debenture is "an unsecured bond, and as such, it has no lien against specific property as security
for the obligation. For example, Mid–Texas Healthcare System has $5 million of debentures
outstanding. These bonds are not secured by real property but are backed instead by the revenue–
producing power of the corporation" (Gapenski, 2008, p.345). Debenture holders are, "therefore,
general creditors whose claims, in the event of bankruptcy, are protected by property not otherwise
pledged. In practice, the use of debentures depends on the nature of the firm's assets and general
credit strength" (Gapenski, 2008, p. 345).
f) Subordinate debenture has a claim on assets in the event of bankruptcy only after senior debt has
been paid off. In

Desert Valley Case Summary
The purpose of this memo is to review the different options for Desert Valley's financing, taking into
consideration the impact on earnings–per–share (EPS) and the tax return.
Situational Analysis
– Marcus provided Desert Valley with a $4,000,000 loan which is repayable on demand. Now that
the brewery is profitable, Marcus would like to be repaid over the following year. The management
team at Desert Valley is concerned about repaying Marcus while trying to support long–term growth
and funding the hydroponics venture.
To repay Marcus and execute on the brewery's strategic objectives, Desert Valley will need
additional financing of $3,000,000. Management is trying to decide whether a term loan, unsecured
debenture, or a preferred shares issue ... Show more content on Helpwriting.net ...
The term loan and debentures will reduce net income and in turn reduce the earnings–per–share
figure.
– Tax return o The term loan and debentures include interest which can be deducted before reaching
taxable income while the preferred shares pay out dividends after taxable income. Therefore, from a
tax perspective, the term loan and debenture options are preferred.
Recommendation
– The debentures provide the least amount of restrictions and allows current shareholders to
maintain their current ownership percentages. While it may be the most expensive option, Desert
Valley generates sufficient cash flows to absorb it. INTERNAL MEMO
TO: Keith Morse
FROM: Li Chan, CPA
DATE: September 15, 2015
SUBJECT: Activity 7B – Disaster Recovery

Chapter 7: Corporate Reorganizations Research Problem 1...
Research Problem 1) New Gate corporation desires to acquire Old Post in a non–taxable transaction.
Prior to entering into this transaction with New Gate, Old Post issues $800,000 worth of 15–year
bonds paying 6% annually. The bonds are purchased by most of Old Post's shareholders and also by
many individuals who have no affiliation with Old Post. New Gate makes an offer to the
shareholders to exchange two shares of its common voting class A stock for each common share of
Old Post and 20 of common voting class B stock for each preferred share of Old Post. Most of the
shareholders are reluctant to make the exchange because of the favorable terms of the Old Post
bonds they are holding. Consequently, New Gate offers to acquire all of ... Show more content on
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Some of the debentures of Y are held by its shareholders, but a substantial proportion of the Y
debentures are held by persons who own no stock.
Further reading indicates the reorganization of Old Post and New Gate will qualify as a "Type B"
tax–free reorganization even with the bonds involved because due to the fact that there are many
non–stockholders who are bond holders.
Regarding the bond exchange offered by New Gate, any gain is not recognized per this IRS ruling:
Section 354(a)(1) provides that no gain or loss will be recognized if stock or securities in a
corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged
solely for stock or securities in another corporation a party to a reorganization.
I'm working off of the premise is that the bond exchange is not a part of the voting stock exchange
by New Gate to Old Post shareholders but rather is a separate exchange.
The New Gate offer of exchanging stock of varying common classes does meet the IRS ruling
requirements listed below:
Section 1.368–2(c) of the Income Tax Regulations provides: In order to qualify as a
"reorganization" under section 368(a)(1)(B), the acquisition by the acquiring corporation of stock of
another corporation must be in exchange solely for all or a part of the voting stock of the acquiring
corporation . . . , and the acquiring corporation must be in control of the other corporation
immediately after the

Law Case Study
Facts of Solomon v Solomon
Solomon was a leather merchant who converted his business into a Limited Company as Solomon
& Co. limited (the 'company'). The company so formed consisted on Solomon, his wife and five of
his children as members. The company purchased the business of Solomon for £39,000; the
purchase consideration was paid in terms of £10,000 debentures conferring a charge over the
company's assets, £20,000 in fully paid, £1 share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceedings commenced. The
assets of the company were not even sufficient to discharge the debentures (held entirely by
Solomon himself). And nothing was left for unsecured creditors. The liquidator ... Show more
For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in
taking part in the business. Salomon decided to incorporate his business as a Limited company,
Salomon & Co. Ltd.
At the time the legal requirement for incorporation was that at least seven persons subscribe as
members of a company i.e. as shareholders. Mr. Salomon himself was managing director. Mr.
Salomon owned 20,001 of the company's 20,007 shares – the remaining six were shared
individually between the other six shareholders (wife, daughter and four sons). Mr. Salomon sold
his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was
thus simultaneously the company's principal shareholder and its principal creditor.
He asked the company to issue a debenture of £10,000 to him. However, a sudden slow down in
business occurred and the company could no longer pay interests to Salomon. Even the wife puts
money, but the company still cannot pay. Finally, Salomon transfers the debenture to one B, but still
the company could not pay. B is here a secured creditor, in relation to the company, as he holds in
respect of his a security over property of the company in term of the debenture. B called for a
receiver and therefore, sold the easiest part of the company, i.e., the factory to cover his debts. That
led to the end of the

Indian Financial System
FINANCIAL MANAGEMENT ASSIGNMENT ON INDIAN FINANCIAL SYSTEM &
SOURCES OF LONG TERM AND SHORT TERM FINANCES SUBMITTED BY, PREMJITH.A
P10144 PGDM 2010–12 INDIAN FINANCIAL SYSTEM The financial system in india refers to
the system of ... Show more content on Helpwriting.net ...
They may be issued with or without a maturity period. REDEEMABLE PREFERENCE SHARE are
shares with maturity and IRREDEEMABLE PREFERENCE SHARES without any maturity. The
holder of preference shares get dividend at a fixed rate. With regards to dividend, preference shares
may be issued with or without cumulative features. In the case of CUMULATIVE PREFERENCE
SHARES unpaid dividends accumulate and are payable in the future. Dividends in arrears do not
accumulate in the case of NON CUMULATIVE PREFERENCE SHARES. Features of Preference
share Claim on income and assets: preference share is a senior security as compared to ordinary
share. It has a prior claim on the company's income in the sense that the company must first pay
preference share dividend before paying the ordinary dividend. Fixed dividend: The dividend rate
are fixed in the case of preferences share, and preference dividend are not tax deductable.
Cumulative dividend: that all past unpaid dividend be paid before the ordinary dividends are paid.
Ordinary Shares: represents the ownership position in a company. The holders of ordinary shares
called shareholders are the legal owners of the company. Ordinary shares are the sources of
permanent capital since they do not have a maturity date. However, the ordinay shareholders are
entitled to receive dividends. The amount or rate of dividends are not fixed. An ordinary share is

bank 301
9: Woodside Petroleum Limited is about to raise additional short–term funding to meet its funding
needs over the next three–month planning period. It is considering issuing commercial bills or
promissory notes.
(a) What is a promissory note? Identify and briefly explain the roles of the parties to a P–note issue.
(b) What are the main differences between P–notes and commercial bills of exchange?
A promissory note, which typically has a maturity of 90 days, is described as 'an unconditional
promise in writing made by one person to another, signed by the maker engaging to pay, on demand
at a fixed or determinable future time, a sum certain in money to the order of a specified person or
to the bearer' (Viney & Phillips 2012, 308).
The ... Show more content on Helpwriting.net ...
(b) Explain the effects of the with–resource and notification conditions that may be incorporated in a
factoring contract.
Factoring is the means in realising debts whereby a firm sells its receivables to a factoring company,
which will then chase the creditors for the debts, making this form of debts a form of asset–based
finance (Kravaica et al 2006). The factoring firm would purchase the accounts receivable at a
discount to the face value, which is the cost of the firm's efforts in collecting the debts on behalf of
the firm. The cost of the firm is the discount of the accounts receivable but the benefit of the firm
relying on the factoring service is its access to the funds and not having to expend its efforts in
chasing for the debts (Viney & Phillips 2012, 313).
Factoring has been used in increasing popularity for small and medium sized enterprises because
these firms do not have the advantage of a large firm in terms of borrowing and therefore, rely on
factoring for their working capital (Borgia et al 2010).
The factoring contract may vary for different firms but it will specify the parties that are responsible
for future bad debts in case some of the debts become uncollectible. A contract with recourse
factoring means that the factoring company may make a claim against the firm should the accounts
receivable debt becomes bad (Viney & Phillips 2012, 313). Logically, the contract with recourse
would have a lower discounting to the

Stockland Corporation Limited: A Case Study Of Stockland...
Stockland Corporation Limited is a diversified property group . It is one of Australia's largest
property group . Stockland was founded in 1952 . When the company was founded, they have a
vison of contribute to the development of their cities and achieve growth and make profits .In 1957,
Stockland listed on the Australian Stock Exchange.In 1965 , Stockland opened its first commercial
development . The headquarters of Stockland is located at Castlereagh Street in Sydney, Australia .
The founders of the company are Albert Scheinberg and Ervin Graf . The products of Stockland
includes retail centers, business parks, logistics centers, office buildings, residential communities ,
retirement living villages , housing estate, shopping center management and others . The
responsibility of the company has done towards the society and environment includes reduces
energy used significantly by using LED lights . LED lights uses less energy compared to the
traditional bulb . Other than that , Stockland reduces the water used by the company . Then ,
Stockland will assure that their products are in best quality before they sell it to their customers.
Besides , Stockland.has a community that ... Show more content on Helpwriting.net ...
It can be classified into 2 categories . Internal source or external source of finance . Internal source
of finance can be done by using retained profit. It is the profit that the company kept rather than pay
it to the shareholders . It is kept in the company for further business expanding purposes . But not all
business makes profit , it might not be enough to finance the business expansion . The advantages of
choosing this source of finance is that it is cheap because the only cost is to pay shareholders when
the company earn profit . It will allow the business to have full control of the business because there
are no any new shareholders or partners come in to the company and control the business

Health and Wealth Event
Finance is important to a business, without it, an organisation would not be able to run effectively,
eventually leading the organisation to fail. The are many reasons why Finance is important to an
organisation and many factors in can be used for, i.e. investing and purchasing fixed assets like land
and building, necessary equipment and expanding the business. Organisations that have a solid
finance available to their business are able implement changes that want, which could help to bring
in more money to the organisation and allowing them to last and survive. There are two types of
finances, external sources or internal sources.
Sources of Finance:
External sources of finance are available sources of income that have come from ... Show more
Debentures holder has to paid interest regularly. They also get preference of being paid first in case
of wind–up of the company.
3. Public Deposits
Public also like to deposit their savings with a popular and well–established company which can pay
interest periodically and payback the deposit when due.
4. Retained earnings
The company may not distribute the whole of its profits among its shareholders. It may retain a part
of the profits and utilize it as capital. The company may use its retailed earning as long–term
investment i.e. expanding business, purchasing machinery, etc.
5. Term loans from banks
As with short–term finance, banks are an important source of longer–term finance. Many industrial
development banks, cooperative banks and commercial banks grant medium term loans for a period
of three to five years. For businesses, using bank loans might be relatively easy but the cost of
servicing the loan (paying the money and interest back) can be high. If interest rates rise then it can
add to a businesses cost.
Advantages: You get regular income and fixed dividend coming in even if the company is making
profit or not. With this share, you do not have any interference in the management. There is Flexible
Capital structure in this share.
Disadvantage:

In these shares, you are not eligible for extra dividend even if the Company make high profit. At the
time of liquidation, no

Stock Market and Cost
CHRIST UNIVERSITY BANGALORE IV BBA B ASSIGNMENT DATE OF SUBMISSION:
25.02.2011– FRIDAY
1.a) X Ltd. issues Rs.50,000 8% debentures at par. The tax rate applicable to the company is 50%.
Compute the cost of debt capital. b) Y Ltd. issues Rs.50,000 8% debentures at a premium of 10%.
The tax rate applicable to the company is 60%. Compute cost of debt capital. c) A Ltd. issues
Rs.50,000 8% debentures at a discount of 5%. The tax rate is 50%, Compute the cost of debt capital.
d) B Ltd. issues Rs.1,00,000 9% debentures at a premium of 10%. The costs of floatation are 2%.
The tax rate ... Show more content on Helpwriting.net ...
B
13. The following is the capital structure of Saras Ltd. as on 31–12–2005. | Rs. | Equity Shares–––
20,000 shares of Rs. 100 each | 20,00,000 | 10% Preference Shares of Rs.100 each | 8,00,000 | 12%
Debentures | 12,00,000 | Total | 40,00,000 |
The market price of the company's share is Rs.110 and it is expected that a dividend of Rs.10 per
share would be declared after 1 year. The dividend growth rate is 6%. 1) If the company is in the
50% tax bracket, compute the weighted average cost of capital.
Assuming that in order to finance an expansion plan, the company intends to borrow a fund of Rs.20
lakhs bearing 14% rate of interest, what will be the company's revised weighted average cost of
capital? This financing decision is expected to increase the dividend from 6% to 9%.

Long-Term Financing Measures
Financing Financing comes in different forms and is issued for various reasons. It also comes with
different processes and requirements and is stated in different ways. Some financing is secured by
company assets where some is unsecured and only backed by unpledged assets in the case of
default. Long–term financing measures can range from 10 year to 30 year pay back periods. A
mortgage is a form of security against a loan given in advance. The mortgage loan is a term loan
secured by the mortgaged property. There are residential mortgages and commercial mortgages.
Residential mortgages are housing loans and typically are taken over a 30 year period, but can be for
shorter periods. Some homeowners take them out for a 15 year period to pay less in interest costs.
Commercial mortgages are usually a period of less than 10 years. Mortgage loans include either
fixed or variable interest rates. The fixed interest rates will typically reset every two to three years.
The variable interest rates fluctuate at the interest rates fluctuate with the economy. Mortgage loans
are usually amortized with monthly loan installments. If the amounts are above 80% of the loan–to–
valuation–ratio, it will generally require mortgage insurance to be maintained for the life of the loan.
If the homeowner does not maintain the mortgage insurance for the life of the loan, they could be
considered in default of the loan, giving the mortgage company the right to demand the full balance
owed at that

Disadvantages Of Life Insurance
INVESTMENT AVENUES 1. Life Insurance Life insurance is a contract for payment of a sum of
money to the person assured (or to the person entitled to receive the same) on the happenings of
event insured against. Usually the contract provides for the payment of an amount on the date of
maturity or at specified dates at periodic intervals or if unfortunate death occurs. Among other
things, the contracts also provide for the payment of premium periodically to the corporation by the
policy holders. Life insurance eliminates risk. The major advantages of life insurance are given
below:  Protection Saving through life insurance guarantees full protection against risk of death of
the saver. The full assured sum is paid, whereas in other schemes ... Show more content on
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The maturity period may range from 5 years to 10 years in India. They may be redeemed in
installments. Redemption is done through a creation of sinking fund by the company. A trustee
Incharge of the fund buys the debentures either from the market or owners. Creation of the sinking
fund eliminates the risk of facing financial difficulty at the time of redemption because redemption
requires huge sum. Buy back provisions help the company to redeem the debentures at a special
price before the maturity date. Usually the special price is higher than the par value of the
debenture. Indenture It is a trust deed between the company issuing debenture and the debenture
trustee who represents the debenture holders. The trustee takes the responsibility of protecting the
interest of the debenture holders and ensures that the company fulfills the contractual obligations.
Financial institutions, banks, insurance companies or firm attorneies act s trustees to the investors.
In the indenture the terms of the agreement, description of debentures, rights if the debenture
holders, rights of the issuing company and the responsibilities of the company are specified clearly.
Debentures are classified on the basis of the security and convertibility

Julian Eastheimer Essay
As a finance student, you should be able to help Bentley by telling him which companies in Section
B should use the financing methods listed in Section A.
Section A Leasing arrangements Long–term bonds Debt with warrants Friends or relatives Common
stock: non–rights Preferred stock (nonconvertible) Common stock: rights offering Convertible
debentures Factoring
Section B
Boudoir's Inc. Timberland Power & Light Ripe and Fresh Canning Company Piper Pickle Company
Copper Mountain Mining Company Bull Gator Saloon and Dance Hall Golden Gate Aircraft
Corporation Schooner Yachts Teller Pen Corporation
Financing Method Company Reasoning
1. Leasing arrangements Boudoir's Inc. The ... Show more content on Helpwriting.net ...
Another option is the issuing of preferred stock, the company's common stock is already overvalued
in the market; therefore, sourcing additional capital through common stock might result to lower
proceeds. Common stock: rights offering Golden Gate Aircraft Corporation Issuing additional debt
to finance the company expansion would worsen the company's debt ratio as it is already more than
average. The company envisions to be profitable by raising capital from existing stockholders by
issuing common stock through rights offering. Convertible debentures Teller Pen Corporation The
company's leverage ratio is 28% – 72% of its assets are financed by common equity and the
company was profitable in the last reporting period. The company should easily raise additional
funds from creditors and a convertible debenture will be an appealing venture for creditors who
would want to purchase stocks of the company in the future. Factoring Ripe and Fresh Canning
Company The company's credit terms are 60–day, but it needs to pay its purchases within 30 days
after purchase. Factoring would provide a short–term solution to reduce the gap between average
collection and payment periods.
Answers:
Leasing arrangement Boudoir's, Inc. The company can negotiate for a lease to own arrangements for
the new building with a builder/contractor.
Long term bonds Timberland Power & Light Given that the maximum long term debt

Salomon & Co. Ltd Case
Salomon V Salomon & Co Ltd case: Salomon was a prosperous leather merchant who specialized in
manufacturing leather boots. For a long time he ran his business as a sole proprietor. By 1892, his
sons had become fascinated with taking part in the business. Salomon chose to consolidate his
business as a Circumscribed company, Salomon & Co. Ltd. At the time the licit requisite for
incorporation was that at least seven persons subscribe as members or partners of the organization
i.e. as shareholders. And Mr Salomon was managing director. Mr Salomon possessed 20,001 of the
company 's 20,007 shares – the remaining six were shared individually between the other six
shareholders (wife, daughter and four sons). Mr Salomon sold his business ... Show more content on
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First court: The judge, Vaughan Williams J. acknowledged this argument, deciding that since Mr
Salomon had made the organization singularly to exchange his business to it, therefor the
organization and Salomon were one unit; the organization was actually his specialists and he as vital
was at risk for obligations to unsecured lenders. Court of Appeal: The Court of Appeal also ruled
against Mr. Salomon, on the grounds that Mr. Salomon had abused the privileges of incorporation
and limited liability, which the Legislature had intended only to confer on "independent bona fide
shareholders, who had a mind and will of their own and were not mere puppets". The lord justices of
appeal variously described the company as a myth and a fiction and said that the incorporation of
the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with
limited liability. The Court of Appeal additionally ruled against Mr. Salomon, in light of the fact that
Mr. Salomon had misused the benefits of incorporation and limited liability. The House of Lords:
The House of Lords upon critical clarification of the 1862 Companies Act, crushed the ruling of the
Court of Appeal's. As Salomon followed the required procedures to the set the company; shares and
debentures were issued. The House of Lords held that the firm has

Public Joint Stock Company
Abstract:
In the name of God them Merciful the most Compassionate, I wrote this research to everyone want
to successes and get a good knowledge in the Stocks Issued by A Public Joint Stock Company
(PJSC), I wrote this paper to every man and women and I put this project between their hand. I
discuss in this project the characteristics of the share, types of shares, negotiation of shares in more
deep details, loan stock(Debentures) and the last thing is the loss and destruction of shares and
debentures. I try to collect as much as I can from the UAE Law. Finally, this project adds a good
value to me and I hope it will be a good paper.
First of all let me give you the definition of the company: Article 4: "a contract in accordance with
... Show more content on Helpwriting.net ...
It only states that it is the property of its bearer. This type of shares is transferred through delivery.
Its holder is the owner before the company.
3) Capital shares and enjoyment shares:
Enjoyment shares are the shares whose value was consumed. The capital shares are those whose
value was not consumed.
Consumption means returning the value of shares to shareholders before the company dissolution.
In principle, this return should not happen because the company member has the right to stay in it.
However the consumption of shares seems necessary in certain cases. If the company property, for
instance, decays with the passage of time such as mines and quarries. These companies consume
shares during their life so that shareholders don't find themselves unable to retrieve their share value
upon termination of the company.
Often, share consumption is made through assigning a part of profit each year to consume a part of
shares by draw. The shareholder whose share was consumed receive the nominal value as well as an
enjoyment share granting him a right to company profit and a right to vote in the general assembly.
4) Ordinary shares and preference shares:
In principle, shares are of equal value and they grant shareholder equal rights. The company statute
may, however, stipulate that the company issue preference shares granting preferential rights relative
to profits, voting or liquidation proceeds.
Negotiation of

Csr Ltd. : Business Nature And Other Issues
Abstract Company is considered as an association where member shares a common purpose and
unites for focusing their various talents to achieve declared goals. CSR Ltd. is an Australian
industrial company which manufactures building products along with this it also has an investment
in Tomago Aluminium Smelter. CSR Ltd. is a publicly traded company. In this study capital rising
options of Jonson P/L is discussed along with business nature and other issues of CSR Ltd. Part: A
Introduction A company is a company which formed and registered under the specific company act
and a company will be treated as an invisible, artificial person, intangible, legal entity, perpetual
succession, created by law and a common seal. A company is never affected by death, insolvency or
insanity of its individual member. Company is considered as an association where member shares a
common purpose and unites for focusing their various talents to achieve declared goals. There are
two types of Company, public limited company and private limited company. Share of public
limited company is traded publicly but the share of private limited company is not traded publicly. A
group of people take the initiative of forming a public limited company and after registration
initiators raised capital through different procedure. Raising capital is a very big challenge for the
initiator of the public limited company. After completing all necessary formalities, company offers
its shares to the public to

Sources of Business Finance
Q–1. Discuss about different Sources of Business Finance.
Different Sources of Business Finance
Business is concerned with the production and distribution of goods and services for the satisfaction
of needs of society. For carrying out various activities, business requires money. Finance, therefore,
is called the life blood of any business. A business cannot function unless adequate funds are made
available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care
of all financial requirements of the business. A business person, therefore, has to look for different
other sources from where the need for funds can be met. A business can raise funds from various
sources. Each of the sources has ... Show more content on Helpwriting.net ...
Further, through their right to vote, these shareholders have a right to participate in the management.
However, equity shares also carry more risk.
2. Preference Shares
The capital raised by issue of preference shares is called preference share capital. The preference
shareholders enjoy a preferential position over equity shareholders in two ways: (i) receiving a fixed
rate of dividend, out of the net profits of the company, before any dividend is declared for equity
shareholders; and (ii) receiving their capital after the claims of the company's creditors have been
settled, at the time of liquidation. In other words, as compared to the equity shareholders, the
preference shareholders have a preferential claim over dividend and repayment of capital.
Preference shares have some characteristics of both equity shares and debentures. Preference
shareholders generally do not enjoy any voting rights. Investments in these shares are safe, and a
preference shareholder also gets dividend regularly.
3. Debentures
Debentures are an important instrument for raising long term debt capital. Whenever a company
wants to borrow a large amount of fund for a long but fixed period, it can borrow from the general
public by issuing loan certificates called Debentures.
A company can raise funds through issue of debentures, which bear a fixed rate of interest. A
debenture is issued under the common

Financial Statements
CHAPTER–I
FINANCIAL STATEMENTS
LEARNING OBJECTIVES
After studying this chapter, you will be able to:
Explain the meaning of financial statements of a company;
Describe the form and content of balance sheet of a company;
Prepare the Balance Sheet of a company as per Schedule VI Part I of the Companies Act 1956.
Know the major headings under which the various assets and liabilities can be shown.
Explain the meaning, objectives and limitations of analysis using accounting ratios
Calculate various ratios to assess the solvency, liquidity, efficiency and profitability of the firm.
Interpret the various ratios for inter and intra–firm comparison. define Cash Flow Statement
know its objectives
... Show more content on Helpwriting.net ...
Employees and Trade Unions
Employees are interested in better emoluments, bonus and continuance of business and whether the
dues like provident fund, ESI et., have been deposited with the authorities.
They would therefore, like to know its financial performance and profitability and operating
sustainability.
Government and its agencies
Financial statements are used by government and its agencies to formulate policies to regulate the
activities of business, to formulate taxation policies, to compile national income accounts.
Taxation authorities such as income tax department use the financial statements for determination of
income tax; sales tax department is interested in sales while the excise department is interested in
production.
Stock exchange
Stock exchange uses the financial statements to analyze and thereafter, inform its members about
the performance, financial health, etc. of the company, to see whether financial statements prepared
are in conformity with the specified laws and rules and to see whether they safeguard the interest of
various concerned agencies.

Other Regulatory authorities (such as, Company Law Board, SEBI, Stock Exchanges, Tax
Authorities etc.) would like that the financial statements prepared are in conformity with the
specified laws and rules, and are to safeguard the interest of various concerned

Debentures Essay
Debenture is most important instrument and method of raising the loan capital by the company. A
debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to
pay a specified amount with interest and although the money raised by the debentures becomes a
part of the company's capital structure, it does not become share capital. Section 2 (30) of the
Companies Act, 2013 define inclusively debenture as "debenture" includes debenture stock, bonds
or any other instrument of a company evidencing a debt, whether constituting a charge on the assets
of the company or not.
The power to issue debentures can be exercised on behalf of the Company as a meeting of the Board
under the provisions of Section 179 (3) of the Companies Act, 2013. Further Section 71 of the
Companies Act, 2013 deals with the provisions relating to the issuance of debentures provides that a
company may issue debentures with an option to convert such debentures into shares, either wholly
or partly at the time of redemption. Provided that the issue of debentures with an option to convert
such debentures into shares shall be approved by a special resolution passed by the shareholders in a
duly convened general meeting of the company. ... Show more content on Helpwriting.net ...
It enables issue of shares to debenture holders in exchange of the amount due to them, where the
terms of issue of debentures provide for such an exchange and such terms are approved both by the
special resolution of the general meeting and by the Central Government. Joint Stock Companies
can issue either non–convertible or convertible debentures. Convertible debentures are further
classified as
A. Fully convertible debentures

Mci Coorporation
1. What is the likely level of MCI's external financing needs over the next several years?
Based on the Exhibit 9A in the case, we can calculate the Source and Use of Funds. As Exhibit 1
suggests, the company require about $4.8 billion during 1984 and 1990. This is basically due to the
required new capex during the same period, which will be accumulated to $10.2 billion, and the
increase of cash holding, $2.0 billion, as a use of funds and the company can generate funds from
operation, only $7.8 billion. Therefore, the company needs to fill the gap by sourcing external
finance of about $4.8 billion. This amount will vary depending primarily on two factors; 1) whether
MCI can expand market share as forecasted amid the increasing ... Show more content on
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Why?
We suggest that the company should take the option 3. Firstly, as mentioned in the above, the
company requires $4.8 billion during 1984 and 1990 and option 3 can provide largest fund
compared with option 1 and 2. Secondly, the option 3 incurs the least interest rate, 7.5%. Thirdly,
even though the company needs to increase the debt ratio in the short run, they can adjust it later
with the conversion option, which gives the company flexibility for capital

A Company Is A Separate Legal Entity
The concept of a company being a separate legal entity is the most striking illustration in separating
the company from its owners. A paramount principle of corporate law is that no shareholder or
member of a company is made liable for the obligations incurred by such incorporations A company
is different from its members in the eyes of law. In continuations to this the opposite also holds true
in the sense that neither can the company be held liable for the acts of its members. It is a
fundamental distinction that a company is distinct from its members. The words, "corporate entity is
not imaginary or fictitious but quite real, whereas corporate personality is a fiction whose origin is
to be found in the psychological tendency towards personification" gives an idea that the legal
doctrine of corporate personality was built around the idea of a sovereign grant of certain attributes
of personality to a definable group, which was engaged in an enterprise. When a company is
incorporated it is treated as a separate legal entity distinct from its promoters, directors, members,
and employees, which confers the benefit of not being responsible for the companies debt on the
members on the company. However even though a company is a separate legal entity and it attains
the advantage of not laying the responsibility of company's debt on the ... Show more content on
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Unlike partnership, a company is distinct from the members and is capable of enjoying rights and
duties in its own capacity, which is not the same as those of its members. As Lord Macnaughten in
Solomon v Solomon & Co Ltd case quotes "the company is at law a different person altogether from
the subscribers and the company in law is not the agent of the subscriber or trustee for them. Nor are
the subscribers as members liable, in any shape or form, except to the extent and in manner
provided by the

Sahara vs Sebi Case
LEGAL ASPECTS OF MANAGEMENT ASSIGNMENT
SAHARA INDIA REAL ESTATE CORPORATION LIMITED AND OTHERS VS SECURITIES
AND EXCHANGE BOARD INDIAAND ANOTHER
Presented by: Ateendra Mishra Section a Roll No.:48
1
INTRODUCTION ABOUT THE CASE
On, 31st Aug, 2012, Supreme Court of India passed a landmark judgment wherein, the honorable
court ordered business conglomerate and leading sports sponsor Sahara to refund more than $3
billion it collected from millions of small savers. It all started when in 2008 the two companies of
the group Sahara India Real Estate Corporation Ltd. (SIRECL) and the Sahara Housing Investment
Corporation Ltd. (SHICL) started raising funds through Red Herring Prospectus (RHPs), and had
collected  Rs 17, 400 till March 13, ... Show more content on Helpwriting.net ...
The option has to be indicated in the application form itself. However, interest on FCDs is payable
at a determined rate from the date of first conversion to the second / final conversion and in lieu of
it, equity shares are issued. Optionally Fully Convertible Debentures where the OFCD holder
(purchaser),[Generally on the discharge of the debt by the issuer entity at the specified time]gets an
option to obtain equity shares of the entity issuing (selling) such OFCDs, in lieu of cash, based on
the terms determined at the time of issue/sale of these instruments.
6
Indian Laws relevant to the case
The following are the main points of contention between the two parties involved in the case. The
points before the Judiciary were as follows:  The first relates to the nature of OFCDs themselves,
and;  The second is on whether SEBI has the jurisdiction to regulate OFCDs.  Securities
Contracts (Regulation) Act, 1956
Section 2(h) of the SCR Act defines the term "securities" to include (i ) shares, scrips, stocks, bonds,
debentures, debenture stock or other marketable securities of a like nature in or of any incorporated
company or other body corporate; (ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the investors in

such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the of Security Interest
Act,2002; (ii) Government securities; to be securities; and
Securitisation and

Dogloo
Overview Lewis Byrd, a partner of Opportunity Capital Partners and the lead in the Dogloo
investment, is currently facing the issues below: * Dogloo is in the lawsuit regarding Doskocil's
trademark infringement, which is consuming large amount of money and management time thus
detrimental to Dogloo's healthy growth. * Dogloo's products are facing significant increasing market
demand, which exposed its outsourced manufacturers' inability to increase capacity and led into lost
sales. * Aurelio Barreto, CEO of Dogloo, is not meeting expectations to work within the financial
and organizational constraints of the company, despite his strong product development and
marketing capabilities. The proposed solutions are outlined below ... Show more content on
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Analysis – Investment Structure The total amount of the investment is worth $7 million and is
invested by the below parties: * Synenergy Diversified Capital – committed capital of $6.25 million
* Opportunity Capital Corporation – $150,000 * Opportunity Capital Partners – $600,000 The $7
million is in the form of subordinated debentures that matures in 7 years with an interest rate of
13%. This rate is very high because subordinated debentures investors bear significantly more risk,
which is a major drawback of this form of investment since the debt might not be repaid. The
biggest benefit for Dogloo to issue subordinated debenture is that the subordination makes the debt
being accounted in the company's equity based on the balance sheet. This effectively improves the
company's leverage ratios and allows the company to obtain future loans more easily. Analysis –
Return on Investment OCC and OCP together invested $750,000 into Dogloo in the form of
subordinated debenture with 13% interest rate, which guarantees them stable interest cash inflows
each year (Exhibit 4). The two investors' combined ownership interest will be 0.5% of the Dogloo's
equity value because the company's equity valuation is $213 million, exceeding $80 million; this
will be the cash inflow at exit for the investors. Through calculation, the required equity value at
exit is $238 million if the investors have an estimated IRR of 25% (Exhibit 4). Conclusion Based on
the

Sources of Finance
Sources of Finance
The financing of every business is the most fundamental aspect of its management. Get the
financing right and the company will have a healthy business, positive cash flows and ultimately a
profitable enterprise. The financing can happen at any stage of a business 's development. On
commencement of your enterprise the business entity will need finance to start up and, later on,
finance to expand.
Finance sources may be internal or external but they may also be short, medium or long term. *
Short Term Finance the Business for up to One year. * Medium Term Finance the business for up to
Five years. * Long Term Finance the business for more than Five years.
A. Long and Medium Term Sources of Finance 1. ... Show more content on Helpwriting.net ...
* They increase their stability and raise the credit score used by banks that value the company's risk
* It is a low–risk investment which increases the chances of a company securing bank financing for
future needs.
Disadvantages:
* If the company uses more bank loan, it will over–leverage company's assets.
5. Mortgages
It is the transfer of the property to a lender on the assumption that the borrower agrees to terms of
repayment of the debt, after which time the asset will be transferred to the borrower's ownership. A
mortgage is a common form of security for a creditor.
Advantages:
* Interest payments on your mortgage are tax deductible. * Mortgage schedules are pre–set, making
cash management more predictable.
Disadvantages:
* Mortgage requires you to pledge the purchased property to the lender. * Failure to make any
payment on time, bankruptcy, insolvency and breaches of any obligations in the mortgage
agreement will be there. 6. Leasing
It is an agreement between lesser and lessee, the lessee obtains the right to use an item and assets
owned by the lesser in exchange for periodic payments. The lessee's ownership of the assets has
expired at the end of given agreement period.
Advantages:
* It offers fixed rate financing; The Company pays at the same rate monthly. * There is less upfront
cash outlay; the company does not need to

Mgm Harvard Business School Accounting Case
1. Effective Interest Rate on the new 10% debentures = 14.318%
For the 10% debentures, the market value of 1 share is $19.5 (given)
The equivalent of this is a cash offer of $3/share and a 10% subordinated debenture of face value of
$23.
So the PV (10% subordinated debentures with FV $23) = $19.5 – $3 = $16.5
The effective interest rate (yield) on the above is that interest rate 'r' that gives the following
PV (Per period payment of ($23*5% i.e. $1.15) over 40 periods @ r)
+ PV ($23 paid 40 periods hence with a return of r)
$16.5
1.15*(1 – (1/(1+r)^40))/r + 23/(1+r)^40 = 16.5
Solving for r in the above equation we get 14.318% as the effective interest rate.
Similarly, Effective Interest Rate on the old 5% ... Show more content on Helpwriting.net ...
The discount and ending liability for the 5% convertible debentures are calculated as follows. The
market value = .45875 * $30,010 = $13,767. The remaining amount is the discount.
Bond closed @.45875 of par $13,767.09 Discount = 1–.45875 0.54125 $16,242.91 $30,010.00
The new earnings per share number can be calculated as follows.
Pre–Tax earnings in question 3 = $551,869
One–time gain = 13,348,000
Additional interest expense for 2 periods = 855.7 +857.3 = $1,713,000
Reduced interest expense for 5% bonds = 863.4 + 870.4 = $1,733,800
New Pre–tax Net Income = 551,869 +13,348,000 – 1,713,000 + $1,733,800 = 13,920,669
After tax Net income = 13,920,669 *(1–0.48) = $7,238,748
# shares outstanding = 5,321,295 shares (from q3)

Net Income = 7,238,748/5,321,295 = $1.36/share (mainly from the one time gain on the bond
exchange)
6. From the above tables TABLE 2 (new 10% subordinated debentures) and TABLE 3 (existing 5%
convertible debentures) the present values of the exchanged 10% subordinated debentures and the
existing 5% convertible debentures are obtained.
PV (Original 5% convertible debentures) = $30,10 (thousands)
PV (New 10% subordinated debentures) = $16,662 (thousands)
7. The following tables show the Debt/Equity Ratios before and after both exchanges based on book
value of debt. As it is observed, the transactions did not significantly alter the

Mengchao Essay
rP os t
5 – 2 9 6– 0 7 0
REV. JANUARY 29, 2004
TEACHING NOTE
op yo Arley Merchandise Corporation
Objectives and Synopsis
The Arley Merchandise Corporation represents an example of a corporate issuer attempting to
realize a higher price for its common shares by offering potential investors a "money–back
guarantee." In this instance, the guarantee takes the form of a European put option (called a "Right"
in the case) which is exercisable two years from the date of issue.
In some ways, the case represents an example of the design of a security to overcome information
asymmetries in the capital markets. Arley's management has projected a highly confident picture to
the underwriters that the company's future profit ... Show more content on Helpwriting.net ...
The unit proposed for sale in the Arley financing then can be characterized as the sale of a share of
common stock plus a two–year European put option with a strike price of $8 or, alternatively,
through put–call parity, as the sale of a two–year zero–coupon note with face value $8 plus a two–
year European call option on common stock with an exercise price of $8. Thus, the value of the unit
can be broken down in two ways: tC
Market value of the unit
= Market value of stock + market value of put option
= Market value of zero–coupon bond + market value of call option
No
Applying the Black–Scholes model with a two–year riskless rate of 11% per annum, an initial stock
price of $6.50, and a volatility of 40% (as indicated in the assignment question), yields values of the
put and call options of $1.44 and $1.45, respectively.1 Exhibit 4 shows historical volatility data for
comparable firms. The instructor can engage the students in a discussion of how to use this
information in the analysis. The Appendix to this teaching note contains a discussion of these

comparables and sensitivity analysis. However, Black–Scholes is not necessarily applicable because
of default risk associated with this particular put option. That is, put option holders will wish to
exercise their right to receive cash at precisely the time that Arley's stock is low, which is also when
the firm will least be able to fund the $8

Hnd Account Report
ac
Introduction
SSP plc is engaged in food processing, supplying all the main supermarket chains with first class
processed meat products. The last few years have been difficult for the food manufacturing industry
because of food scares surrounding BSE and Foot and Mouth disease, both of which have led to an
increase meat production around the world. As a responsible company, SSP have taken steps to
ensure the health and safety of all there meats in the production chain. This report will analyze the
financial information users, sources of finance and SSP's ratio analysis, which shows cash flow of
SSP over the accounting period and gives and overall analysis after those ratios.
Part 1
There are six kinds of users of financial ... Show more content on Helpwriting.net ...
Bank overdraft is an agree sum by which a customer can overdraw their current account, it is
secured on current assets, repayable on demand and used for short term working capital fluctuations.
It's the loan capital and short–term finance.
Trade credit is often considered a good source of finance as it is normally free. It's the largest use of
capital for a majority of business to business sellers i and is a critical source of capital for a majority
of all businesses. It's the loan capital and short–term finance.
Tax is the pecuniary burden laid upon individuals or property owners to support the government and
a payment exacted by legislative authority, it must be paid but be paid later. It's the loan capital and
short–term finance.
Share capital the portion of a company 's equity that has been obtained by trading stock to a
shareholder for cash or an equivalent item of capital value. There are ordinary shares and preference
shares, which are paid according to the level of profits. It's the equity capital and long–term finance.
Retained profit is the percentage of net earnings not paid out as dividends, but retained by the
company to be reinvested in its core business or to pay debt, and it's not used for dividend but for
expansion. It is recorded under shareholders ' equity on the balance sheet. It's the equity capital and
long–term finance.
Debenture is a document

Cost of Capital
Cost of Capital
Definition: cost of capital is the rate of return that a company must earn on its project investments to
maintain its market value and attract funds. The cost of capital to a company is the minimum rate of
return that is must earn on its investments in order to satisfy the various categories of investors, who
have made investments in the form of shares , debentures and loans. The cost of capital in
operational terms refers to the discount rate that would be used in determining the present value of
the estimated future cash proceeds and eventually deciding whether the project is worth undertaking
or not. It is defined as "the minimum rate of return" that a firm must earn on its investment for the
market value of the firm ... Show more content on Helpwriting.net ...
* Marginal cost of capital – Marginal cost of capital is the weighted average cost of new funds
raised by the firm. For capital budgeting and financing decisions, the marginal cost of capital is the
most important factor to be considered.
Cost of debt : Cost of debt is the interest rate that the company pays on its debt content of the capital
structure. It can be measured as before tax cost of debt or after tax cost of debt. Tax plays an
important role as the debenture interest expense is allowed as an expense for tax purposes. Debt
may be issued at par, at premium or at a discount. It may be irredeemable or redeemable.
Cost of Irredeemable debt: Irredeemable debentures are those debentures issuing by which the
company has no obligations to pay back the value of the debenture on some fixed date or time and
has the full authority to choose any time to pay back the debt until the company is a going entity and
does not default in it's interest payments. So we take into account only the sale value (SV) while
evaluating the cost of irredeemable debentures.
Cost of Redeemable debt: For redeemable debentures, the maturity date is fixed initially. The
meaning redeemable denotes that the debentures would be redeemed by the company at a fixed date
or after a specified period of notice. So, we take the average of Sale Value and Redeemable value
while calculating the cost of redeemable debentures.
Cost of Preference

Salomon V Salomon And Co Ltd
Salomon v Salomon and Co Ltd (1897)
When was law firstly introduced? Laws where present for decades as people where punished for
breaking the laws. In regard to our case, which was in 1897. The case was between Salomon v
Salomon and Co Ltd, which is a person and a company he owned. He filled a case against his
company that the company owes him money and then the creditors of the company reverted the case
on him as being the owner he should be liable to pay them back as the company went to liquidation.
Facts of the case
An entrepreneur called Aron Salomon started a company that produces boots and other leather
products. His children wanted to become partners with their father so Salomon started a new
company called Salomon and Co Ltd. ... Show more content on Helpwriting.net ...
He was paid 5,000 for his debentures. The money came from the sales of assets
Salomon claimed that the amount from the assets sold and bank balance was his, as he also owned
debentures in the company worth 9,000, which made the company liable to pay him back the
remaining amount. After this action the creditors of the company were afraid that the company
would not pay them back. The creditors resisted Salomon's action to claim the rest of the money by
filling a lawsuit against him that the balance of money available is owed to them rather than him as
he is considered the owner of the company and should be accounted for the liquidation and pay
them back from his own money if the balance from the company was not enough.
Rule of the Court
High Court
The case between Broderip v Salomon where Broderip sued Salomon to pay back the amount
Broderip owed the company, was first assigned to the high court with the judge Vaughan. We know
from the facts of the case that Broderip was paid 5,000. The court considered that the company is an
agent by which it was held by Salomon so the first court ruled that Salomon and Co Ltd are
considered as the same person but with different names so Salomon was held liable to pay the
creditors or in this case Broderip back his debenture amounts. Judge Vaughen ruled to Broderip
against Salomon and held Salomon liable to pay back the debenture amount remaining to Broderip.

Court of

My Firm 's Services Regarding Proper Accounting Practices...
It has come to my understanding that you requested my firm's services regarding proper accounting
practices for the acquisition of long term debentures. Therefore, I write to you this memo to address
some issues you might be having with your newly obtained debt and to explain how to properly
amortize it. I have been informed that you already have an accounting expert that advised you to use
the Straight Line method of amortization for the discount on the bond. My expertise lies on the
Effective–Interest method of amortization. 1. Determining Bond Price To determine the price of the
bond, the face value of the bond must be brought to its present value. The rationale behind this
comes from an investment principle that considers that the money given up in the present could
yield a gain in the long term if used as an investment. To arrive to the present value, we use a market
rate that represents the yield the average investor would require to spend money in a new venture (in
this particular case, 11%). Therefore, even though the Bond's face value might be $1,000,000, your
company is expected to get $924,623.74. The difference between this two numbers, $75,376.26, is
considered a discount that you allow for offering a rate that is lower than the rate requested by the
investors (in this case, 9%). 2. Amortization of Discount I took the liberty of creating an
amortization schedule to help you visualize the immediate difference between straight–line and
effective interest methods

Summary Cost of Capital
The Cost of Capital
1
Background
As investors desire to obtain the best/highest return on their investments in securities such as shares
(Equity) and loans to companies such as debentures (Debt), these returns are costs to the companies
paying these Dividends (on equity) and Interest (on
Debts)!
It all depends on the perspective from which we chose to view the calculation (are we Earning or
Paying?)
Companies MUST consider the cost of financing they receive in the form of equity or debt if they
are to manage their finances better; cheaper finance cost to the company means higher profitability
and in most cases, superior cash flow. Generally, the cost of EQUITY has no tax effect but the cost
of DEBT finance to companies are
technically ... Show more content on Helpwriting.net ...
An Example
G plc is about to pay a dividend of £50m in total. When G plc first obtained a stock market listing
four (4) years ago, it paid a dividend of £30m in total. Over the last four years there have been no
changes in the share capital of G plc. You are required to estimate the annual rate of dividend
growth.
Solution
[£30m ×
3
(1 + g) 4
=
£50m] therefore, [g
=
13.62% p.a]
The Cost of Debt

Based on equivalent assumptions to those used in the DVM above, we conclude that:
PV interest stream = Market Value (MV of debenture ) Note:
(DEBT in this case!)
The tax system gives tax relief on interest payments by allowing tax deductions from company's
Profit & Loss account (thus REDUCING taxable profit). This has the effect of reducing the Cost of
DEBT or what do you think?
Lower Tax means lower cost of finance as WITHOUT the tax relief, the company will pay HIGHER
tax bills and the full cost of the loan BUT in this case, you pay the FULL interest BUT save on
TAX, see it?
Therefore the true cost to the company of servicing the debentures will be after the tax relief subsidy
is taken into account.
www.goldsmithibs.com
An Example – irredeemable debentures
M plc has some 8 per cent coupon irredeemable debentures in issue trading at 90 ex int. Corporation
tax is 30 per cent with no lag in payment. Interest is paid annually.
Solution
PV of after–tax interest = current debenture price
£8(1 − 0.30)
Kd
Kd
=
90
=
5.60
90
= 6.2% per

Advantages And Disadvantages Of Equity Share Investments
Advantages of Equity Share Investments:
 Dividend: An investor is entitled to receive dividend from the company.
 Capital Gain: The other source of return on investment apart from dividend is the capital gain
which refers to the gains that arise due to rise in market price of the share.
 Limited liability: Liability of shareholder is limited to the extent of the investment made. If the
company runs into losses, the share of loss over and above the capital investment would not be
borne by the investor.
 Liquidity: The shares of the companies listed on stock exchanges have the benefit of liquidity.
They can be easily transferred.
 Exercise control: By investing in the company, the shareholder gets ownership in the company
and thereby can ... Show more content on Helpwriting.net ...
The issuer of the bond promises to pay a stipulated stream of cash flows at predetermined interest
rates. The payment generally comprises of periodic interests over the life of the instrument and the
principal is paid at the time of redemption. The amount of risk involved in debentures or bonds is
dependent upon who is the issuer. For example, if the issuer is government, the risk is assumed to be
zero. Following alternatives are available under debentures or bonds:
Government securities – Debt instruments issued by the central, state or quasi government bodies
are referred to as government securities or gilt–edged securities. Government securities have terms
ranging from 3–20 years and carry interest rates between 7–10 percent. Even though these securities
are highly secure, they are not very popular with individuals due to their lack of liquidity and low
interest rates.
Savings bonds –These savings bonds are issued by the Reserve Bank of India and also known as
RBI Savings Bonds or Government of India Savings Bonds. These bonds require a minimum of
Rs.1000 and have a maturity period of 5 years. The interest earned is taxable but the bonds are
exempt from wealth tax. These bonds are transferable, can be nominated and can also be offered as
security for availing bank

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