ADL 55 Management of Financial Services V2

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ADL 55 Management of Financial Services V2
Assignment – A

Question 1. What is a IPO? What is the procedure for an IPO?

Question 2. What are the various aspects of project appraisal? Describe the
process and different types of project appraisals.

Question 3. What is loan syndication? Who are the various participants? Describe
briefly various aspects of accessing debt and capital markets?

Question 4. What are the various types of leases? What is the difference in hire
purchase and consumer credit?

Question 5. Write short notes on following:
Leasing Vs. Buying
Securitization

Assignment – B

Question 1. What is Venture Capital? What are the various stages of financing
offered and factors to be taken into account in order to attract Venture
Capital?

Question 2. What is a mutual fund? Describe various types of mutual funds. Also
describe about organization, management and regulation of mutual funds.

Question 3. Write short notes on following :
Credit Rating Agencies
GDR and ADR

Case Study

ABC Industries – Lease Vs. Buy

ABC Company can purchase a $50,000 piece of equipment by putting 25 percent down
payment and paying off the balance at 10 percent interest with four annual
installments of $11,830. The equipment will be used in your business for eight
years, after which it can be sold for scrap for $2,500. The alternative is that
it can lease the same equipment for eight years at an annual rent of $8,500, the
first payment of which is due on delivery. ABC will be responsible for the
equipment’s maintenance costs during the lease.

ABC expects that its combined federal and state income tax rate will be 40
percent for the entire period at issue. Its cost of capital is 6 percent (the 10
percent financing rate adjusted by your tax rate).

Question:

Please calculate the net cash flows for both lease vs. buying options and
suggest which one should ABC go for and why. Assume that depreciation is
computed on the basis of the 20 percent declining balance method.

Assignment – C

1. Which of the following must be satisfied to support a classification as a
finance lease?
1. Ownership is transferred by the end of the lease term.
2. The lease contains a bargain purchase option.
3. The lease term is for the major part of an asset’s useful life.
4. The present value of the minimum lease payments are substantially more or
equal to the asset’s fair value.
(a) 1 and 2
(b) 1, 2 and 3
(c) Any of the four criteria
(d) All of the four criteria

2. Efforts Ltd negotiated a lease on the following terms: the term of the lease
was 5 years; the estimated useful life of the leased equipment was 10 years; the
purchase price was $ 60,000; and the annual lease payment was $ 5,000. This
lease should be classified as:
(a) An Operating Lease
(b) A Finance Lease
(c) Sale and Lease Back
(d) Leveraged Lease

3. The lease analysis should compare the cost of leasing to the
(a). Cost of owning using debt.
(b). Cost of owning using equity.
(c). After-tax cost of debt to measure the effect of leasing on the cost of
equity.
(d). Average cost of all fixed charges.
(e). Cost of owning using the weighted average cost of capital for the firm.

4. Operating leases usually have terms that include
(a). Maintenance of the equipment.
(b). Only partial amortization.
(c). Cancellation clauses.
(d). All of the above.
(e). Only answers ‘a’. and ‘c.’ above.

5. Which of the following statements about listing on a stock exchange is most
correct?
(a). Listing is a decision of more significance to a firm than going public.
(b). Any firm can be listed on the NYSE as long as it pays the listing fee.
(c). Listing provides a company with some “free” advertising, and status as a
listed company may enhance the firm’s prestige.
(d). Listing reduces the reporting requirements for firms, because listed
firms file reports with the exchange rather than with the SEC.
(e). Statements’ b’ and ‘c’ are both correct.

6. Which of the following refers to mezzanine financing
(a) Debt
(b) Equity
(c) Hybrid of Debt and Equity
(d) Use of internal funds

7. The Sarbanes-Oxley Act of 2002 (SOX) was largely a response to:
(a) A series of corporate scandals involving Enron, WorldCom, Global
Crossing, Tyco and numerous others.
(b) Dramatic rise in the US trade deficit.
(c) Charges of excessive compensation to top corporate executives.
(d) Rising complaints by investors and security analysts over the financial
accounting for stock options.

8. A company’s. …. is (are) potentially the most effective instrument of good
corporate governance.
(a) Common stock shareholders
(b) Board of directors
(c) Top executive officers

9. The focal point of financial management in a firm is:
(a) The number and types of products or services provided by the firm.
(b) The minimization of the amount of taxes paid by the firm.
(c) The creation of value for shareholders.
(d) The dollars profits earned by the firm.

10. The long-run objective of financial management is to:
(a) Maximize earnings per share.
(b) Maximize the value of the firm’s common stock.
(c) Maximize return on investment.
(d) Maximize market share.

11. ____________ of an investment bank.
(a). Citigroup is an example
(b). Merrill Lynch is an example
(c). Goldman is an example
(d). B and C are each examples
(e). Each of the above is an example

12. ____________ are financial assets.
(a). Bonds
(b). Machines
(c). Stocks
(d). A and C
(e). A, B and C

13. Firms that specialize in helping companies raise capital by selling
securities are called :
(a). Commercial banks
(b). Investment Banks
(c). Savings Banks
(d). Credit Unions
(e). All of the above.

14. The sale of a mortgage portfolio by setting up mortgage pass-through
securities is an example of ________.
(a). Credit enhancement
(b). Securitization
(c). Unbundling
(d). Derivatives
(e). None of the above

15. Corporate shareholders are best protected from incompetent management
decisions by
(a). The ability to engage in proxy fights.
(b). Management’s control of pecuniary rewards.
(c). The ability to call shareholder meetings.
(d). The threat of takeover by other firms.
(e). One-share/one-vote election rules.

16. Financial assets ____________
(a). Directly contribute to the country’s productive capacity
(b). Indirectly contribute to the country’s productive capacity
(c). Contribute to the country’s productive capacity both directly and
indirectly
(d). Do not contribute to the country’s productive capacity either directly
or indirectly
(e). Are of no value to anyone

17. Investment bankers perform the following role(s ____________
(a). Market new stock and bond issues for firms
(b). Provide advice to the firms as to market conditions, price, etc
(c). Design securities with desirable properties
(d). All of the above
(e). None of the above

18. Theoretically, takeovers should result in ___________.
(a). Improved management
(b). Increased stock price
(c). Increased benefits to existing management of taken over firm
(d). A and B
(e). A, B, and C

19. Important trends changing the contemporary investment environment are :
(a). Globalization.
(b). Securitization.
(c). Information and computer networks.
(d). Financial engineering.
(e). all of the above

20. Higher operating leverage is related to the use of additional __________.
(a). Fixed costs
(b). Variable costs
(c). Debt financing
(d). Common equity financing

21. __________ lease is a long-term lease that is not cancelable and its life
often matches the useful life of the asset.
(a). A financial
(b). An operating
(c). A net
(d). None of the above answers are correct.

22. __________ lease refers to a short-term lease that is often cancelable. For
example, a lease for office space represents this type of lease where the lease
life is less than the useful life of the asset.
(a). A financial
(b). An operating
(c). A net
(d). None of the above answers are correct.

23. Which of the following is not a type of financial lease arrangement?
(a). Sale and leaseback
(b). Indirect leasing
(c). Leveraged leasing
(d). All of the above answers are types of financial lease arrangements.

24. Which of the following statements is most correct as it relates to the
recording of a capital lease?
(a). The current fair market value of the asset being leased
(b). The current fair market value of the asset being leased less the
expected residual value
(c). The present value of the minimum lease payments over the lease period
(d). The present value of the maximum lease payments over the lease period

25. A __________ is generally considered debt that is originally scheduled to be
repaid between 1 to 10 years under a formal loan agreement and is usually
amortized (principal and interest are paid) in equal periodic installments.
(a). Term loan
(b). Revolving credit agreement
(c). Medium-term note
(d). Commitment fee

26. A __________ is charged by the lender to hold credit open for the borrower.
For example, if the firm only uses $100,000 of a $200,000 limit, then the firm
might pay the lender $500 for the unused limit in addition to the interest on
the amount borrowed.
(a). Term loan
(b). Revolving credit agreement
(c). Medium-term note
(d). Commitment fee

27. __________ lease is a lease where the lessee maintains and insures the
leased asset rather than the lessor in a full-service lease.
(e). A financial
(a). An operating
(b). A net
(c). None of the above answers are correct.

28. Your firm currently has a current ratio of 1.90 on $9.5 million of current
assets. You are changing the financing mix of your firm and plan on converting
financing of $1,000,000 in a 6-month loan into a 5-year term loan. The purpose
of this move is to finance a more permanent portion of inventories with a longer
maturity alternative. If the firm issues the term loan, new restrictive
covenants will require that the current ratio remain at or above 2.00. Should
the firm make this change or is there some obvious problem caused by this
proposed change?
(a). Yes
(b). No, don’t make the change; otherwise, the firm will be immediately
violating the new restrictive covenant.
(c). No, don’t make the change; this type of restrictive covenant is not
common on a term-loan, and you should first try to have this covenant removed.
(d). None of the above answers are correct.

29. A __________ represents any restriction imposed on a borrower by a lender
and would be part of the loan agreement.
(a). Negative pledge clause
(b). Covenant
(c). Loan agreement
(d). General routine provision

30. A __________ is a continuously offered debt instrument that is designed to
fill the gap between commercial paper and long-term bonds with maturities
currently ranging from 9 months to 30 years and has gained favor from the
existence of shelf registration.
(a). Term loan
(b). Revolving credit agreement
(c). Medium-term note
(d). Commitment fee

31. A __________ forbids the future pledging or mortgaging of any of the
borrower’s assets.
(a). Negative pledge clause
(b). Covenant
(c). Loan agreement
(d). General routine provision

32. For a company subject to the alternative minimum tax (AMT), __________ is a
“tax preference item,” whereas __________ is not. Such a company may prefer to
__________.
(a). A lease payment; accelerated depreciation; lease
(b). Accelerated depreciation; a lease payment; purchase
(c). A lease payment; accelerated depreciation; lease
(d). Accelerated Depreciation; A Lease Payment; Lease

33. A __________ allows the borrower to have credit up to some maximum amount
over a specific period, but the notes are usually 90 days and allow the company
to renew or borrow additionally.
(a). Term loan
(b). Revolving credit agreement
(c). Medium-term note
(d). Commitment fee

34. Your firm currently has a current ratio of 2.10 on $5 million of current
liabilities. You are financing a $500,000 machine (fixed asset) and $500,000 of
additional inventories with a 5-year term loan. Alternatively, the firm can
finance the additions with a 6-month loan that they will need to get approval to
renew every six months. Existing restrictive covenants require that the current
ratio remain at or above 2.00. Which alternative will keep the current ratio
above 2.00?
(a). 5-year term loan.
(b). Six-month loan that is renewed.
(c). Neither of the loans will keep the current ratio above 2.00.
(d). Both of the loans would keep the current ratio above 2.00.

35. With a capital lease, the amount recorded on the asset side of the balance
sheet is __________.
(a). The current fair market value of the asset being leased
(b). The current fair market value of the asset being leased less the
expected residual value
(c). The present value of the minimum lease payments over the lease period
(d). The present value of the maximum lease payments over the lease period

36. Which of the following statements is most correct as it relates to the
recording of a capital lease?
(a). The capital lease is shown on the lessee’s balance sheet as an asset
and amortized over the asset’s useful life.
(b). The capital lease is listed as an asset on the lessor’s balance sheet
and amortized over lease term.
(c). A capital lease is listed as an asset on the lessee’s balance sheet and
must be amortized over the lease period.
(d). A capital lease is listed as an asset on the lessee’s balance sheet and
must be amortized over the asset’s useful life.

37. A __________ specifies all of the terms of a loan and the obligations of the
borrower.
(a). Negative pledge clause
(b). Covenant
(c). Loan agreement
(d). General routine provision

38. A special purpose vehicle (SPV) raises money by selling __________ where
interest and principal payments are provided by cash flows from a discrete pool
of assets.
(a). Equipment trust certificates
(b). Special purpose securities
(c). Pooled certificates
(d). Asset-backed securities

39. __________ is a long-term, unsecured debt instrument with a lower claim on
assets and income than other classes of debt; while a/(an) __________ bond issue
is secured by the issuer’s property.
(a). A subordinated debenture; mortgage
(b). A debenture; subordinated debenture
(c). A junk bond; income
(d). An income bond; junk

40. Which of the following statements concerning the rights of common
shareholders is correct, or most accurate?
(a). Common shareholders are entitled to a share of the company’s current
earnings in cash.
(b). Common shareholders are entitled to elect the board of directors under a
majority-rule voting system.
(c). Because of their preemptive right, common shareholders are entitled to
always subscribe to new common stock so that they can maintain their pro rata
interest in the company.
(d). Voting by common shareholders can be done either in person at the
shareholders’ annual meeting or by proxy.

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