Mgt201 VU Final Term Current Paper (Feb 2011)
What is difference b/w shares & bonds?
Answer
Shares represents the ownership. suppose a company has launched the 10000 shares and one any person is purchased only 1 share then he is consider as owner of the company. but on the other hand the Bonds are not representative of the ownership.
the second major difference b/w is Shares have long term life but the bonds are limited life.
the third and last main difference b/w the return on bond is predetermined the investor is known that how much he retained from bond but share hold cannot predict the return.
Define Types of Shares?
Answer
there are two main types of Shares(equity) which are given below:-
1. Common Stock
2. Preferred Stock
Common Stock
this is very simple form of stock in which the share holder receive dividends by the management decision and they cannot reinvest these profit for purchasing the dividends. and the common share holder can elect the board of director.
Preferred Stock
this is another type of shares. in which the share holder receive the profit of shares by the Board of Directors and they can reinvest their profit on purchasing the more shares. if company goes down and they can pay more and more loss and vice-versa.
how many types of Risk ?
Answer
There are two main types of Risk.
1. Systematic Risk
2. Un-Systematic Risk
Systematic Risk
this is the risk that cannot be predict at any cost this almost impossible to predict for instance what is the interest rate is to be set by the Government is called Systematic Risk
Un-Systematic Risk
this is the risk that can be occur by the process of the organization. for example the strike of employees as well as management decisions.
Mergers & Acquisitions (M&A):
• The buying & selling of entire firms or divisions of firms is a specialized art in finance.
• Why firms Merge?
– Diversification:
• Reduce Risk and Stabilize Earnings, attain Economies of Scale
• Achieve Long Term Strategic Goals, Gain Larger Market Share and Quick
Growth in size,
– Improving Financial: quick way to improve the Balance Sheet and Cash Flows
– Find Cash: if another firm has large cash flows, cash reserves or liquid assets
• Cherry Picking: It means when Market Value of another similar firm is less
than cost of replacing your own assets it might be better to buy another firm
• Asset Stripping: separate out the non-profitable and sell its assets individually
to generate cash and restore profitability
– Agency Cost: Desire of Managers for Prestige, Power, and Salary sometimes at expense of Shareholders (Owners)
• Winning Management Control (exercise influence on Board). Manager
Salaries Rise (larger firm, Agency Costs). Fear of Losing Job if Taken Over by
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Another Paper:
Q1. What is Spontaneous financing and how can a firm use the Spontaneous financing?
Q2. A firm analyzes number of factors while establishing a target capital structure. In your opinion, what can be the possible drawbacks of using capital structure theory?
Q3. Company XYZ wants to issue more Common Stock of Face Value Rs 12. Next Year the Dividend is expected to be Rs. 3 per share assuming a Dividend Growth Rate of 10% pa.
The Lawyer's fee and Stock Brokers' Commissions will cost Rs 1 per share. Investors are confident about Company ABC so the Common Share is floated at a Market Price of Rs 18 (i.e. Premium of Rs 6).
If the Capital Structure of Company ABC is entirely Common Equity, then what is the Company's WACC? Use New Stock Issuance Approach to calculate the results.
Q4. Suppose Ali Inc. issues ten-year bonds (par Rs. 1,000) with an annual coupon of 8.6%. Similar ten-year bonds are paying 8.0% interest. What is the value of one of Ali's new bonds that is, what should be its price?
Q5. Define securities and explain the concept of direct claim securities.
Q6. Why do firms need to invest in net working capital?
Q7. Where do firms invest excess funds until they are needed to pay bills?
