1.a)ignored non-corporate enterprise
2.c)redeemable preference shares
5.c)designing optimal corporate capital structure
1. . Annuity is fixed sum of money paid every year in at any other fixed interval shorter than a year. This annuity may be by way of return of some principal plus interest payment of against money invested or by way of payment of other dues such as pensions after retirement. In any case it represents out flow of cash from one account to in flow of cash to another account. In this way all annuities involve movements of cash or funds. Therefore all annuities are cash flows that can be suitably represented in cash flow statements. An annuity will be represented as inflow of cash in the cash flow statement for the recipient of the annuity and out flow of cash in the cash flow statement of the person or firm paying out the annuity.
2. The risk of a security is measured in terms of variance or standard deviation of its returns. The portfolio risk is not simply a measure of its weighted average risk. The securities that a portfolio contains are associated with each other. The portfolio risk also considers the covariance between the returns of the investment. Covariance of two securities is a measure of their co-movement it expresses the degree to which the securities vary together. Thus an investor can minimize his risk on the portfolio.
3. Loan amortization is the process of paying back a loan over an extended duration of time along with the interest incurred. The interest to be paid for the amount borrowed, till the loan is completely repaid, is calculated in advance. This is divided by the total number of payments being made and added with the principal payments to arrive at an amount that consists of both the principal as well as the interest. The payments have to be made according to this amortization schedule, which is decided before the loan is issued and could be in the form of simple monthly or annual payments. Before the principal amount is issued, the terms for calculation of the interest are also fixed.
4. NVP- a) Interest rate is a known factor
b) It involves computation of the amount that can be c) It assumes that the cash inflows can be reinvested at d) Reinvestment is assumed to be at the cut-off rate IRR - a) Interest rate is an unknown factor
b) It attempts to find out the maximum rate of invested in a given project so that the anticipated earnings interest at which funds are invested in the project will be sufficient to repay this amount with market rate earnings from the project in the form of cash of interest. Flow will help us to get back funds already invested. c) It also assumes the cash inflows can be reinvented discounting rate in the new projects sited the discounting rate in the new projects. d) Reinvestment funds are assumed to be at the IRR.
SECTION B: CASE LETS
CASE LET 1
Ans 1: ATP inc needs $ 8 million immediately and $ 4 million in four years terms. The Firm requires new machinery for whitch profits may increase substantially. In the present situation needs both short tern and log teens fiancé. Sand ford Enterprises: - The firm needs $16 million. The money to be used to finance machinery plumbing supplies. It has low debt equity ratio and the firm has record of retiring debt prior to maturity. A short term finance for a period of 3 to 4 years term, may be useful to the firm. Sharma Brothers Inc- the Firm needs $ 20 million to expand cabinet and woodworking business It has a good growth prospects. Very good earnings it has. A short term Finance would be appropriate for the firm. Sacheetee energy system- The company is willing to use debt to raise $ 28 million. The Firm is well respected by...
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