Chapter 2; Page 49
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Guys,

Pls see the exercise 2.2 question no.3

Refer the answers below ... is it correct?

Pb = C (PVIFA) + Pn (PVIF) ~ i=7%; n=23yrs

= 100 ( 11.272 ) + 1000 ( 0.2109 )

= 1127.2 + 210.9

= RM 1,338.10


Pb = C (PVIFA) + CP (PVIF) ~ i=7%; n=8yrs

= 100 ( 5.9713 ) + 1090 ( 0.5820 )

= 597.13 + 634.38

= RM 1,231.51

Unit 1 Tutorial 1

1. Differentiate between temporary and permanent current assets.

Temporary Current Assets:
- To meet seasonal fluctuations.
- To meet rising demand during specific period of business cyclical
nature. (when enconomy is strong)

Permanent Current Assets:
- Maintained ALL the time even during enconomic slacks off.
- Maintain minimum level of inventory to meet continuous demand by
customers all year round.

2. What are the three different approaches that firms may adopt to finance
both temporary and permanent portions of current assets.

a. Conservative Approach
- Uses mall amount of short-term debt to finance temporary
current assets.
- The balance finance through sale of some marketable
securities that the firm has invested for this purpose.

b. Maturity Matching / Self-Liquidating Approach
- Match maturity of assets and liabilities.
- Ensure or minimize the risk of firm from unable to payoff
it's maturing obligation in due time.

c. Aggressive Approach
- Part of permanent current assets & temporary current assets
are being financed by short-term sources.
- Degree of aggressiveness depends on proportion of permanent
current assets & fixed assets that is financed by
short-term financing instruments.
- Firm would subject to dangers of rising interest rates &
loan renewal problems.
- Some firm prefers this type of approach because short-term
debt is often cheaper than long-term debt.

3. Differentiate between spontaneous sources of financing and other sources of
financing?

- Spontaneous Financeing:
-> Accruals
-> Accounts Payable

Characteristics:
-> No explicit costs attached.
-> Suitable for daily operations.
-> Unsecured & does NOT require collateral.

4. Define the following:
(a) Accrual expenses
- Services already received but not yet make payment for it.
(Liabilities)
_ Example:
-> Accrued Wages
-> Accrued Income Taxes

(b) Compensating balance
- Banks required borrowers to maintain an average demand deposit
balance equal to 10-20% of loan face amount.
- Particular money unavailable for use; hence,
increases the Cost of Borrowing, because Interest is paid on
Total Amount of Borrowing (include money that borrower cannot touch)

(c) Discount loan
- Bank deducts the interest in advance.
- Thus, borrower receives less than face value of the loan.

(d) Commitment fees
- Percentage interest on the non-borrowed balance of the
Revolving Credit Agreement.
- Example:
-> Agreement which allows firm to borrow up to limit of
$5 Million.
-> Firm already borrowed $3 Million;
Still got $2 Million balance.
-> If fee is 0.5%, then:
Commitment Fees = $2 Million x 0.005
= $10,000

5. Calculate the annual financing cost of foregoing the cash discount under
the following:
(a) 2/10, net 50

AFC = [ 2/(100-2) ] x [ 360/(50-10) ]
= [ 2/98 ] x [ 360/40 ]
= 0.0204 x 9
= 0.1836
= 18.36%

(b) 2/15, net 30

AFC = [ 2/(100-2) ] x [ 360/(30-15) ]
= [ 2/98 ] x [ 360/15 ]
= 0.0204 x 24
= 0.4896
= 48.96%

6. MRSB Bhd. currently is involved in manufacturing of furniture products,
while Wood Malaysia Sdn. Bhd. is the sole supplier of raw wood for MRSB
Bhd. MRSB Bhd. currently purchases an average of RM20,000 per day in raw
materials on credit terms of net 20. The company expects sales to increase
in the near future. Therefore, it anticipates that the raw material
purchase will increase from RM20,000 a day to RM30,000 a day. MRSB Bhd.
believes that part of purchase of raw material could be funded by
stretching accounts payable.

(a) Let us say, the company currently pays its accounts payable at the end
of the credit period (20 days). What is the level of trade credit?

RM20,000 x 20 = RM400,000

(b) If MRSB Bhd. is stretching its accounts receivable an extra 10 days
beyond the original credit period of 20 days, how much additional
short-term funds will be created?

RM20,000 x First 20 Days = RM400,000
RM30,000 x Extra 10 Days = RM300,000

Total Short-Term Funds Created = RM700,000

UNIT 1 TUTORIAL 2

1. Differentiate between medium and long-term financing.

Medium-term Financing:
- Interim substitute for long-term financing needs.
- Provide flexibility in the timing of long-term financing.
- Mature within 1-10 Years
- Offer potential cost advantages over long-term financing.

2. Briefly describe the following:
(a) Term loan
- Intermediate-term Financing
- Debt Obligation having Initial Maturity between 1-10 years.
- Lack the permanency characteristics of long-term debt.
- Payable in periodic terms: Quaterly, Semi-Annually, Annually

(b) Balloon loan
- Make Equal Periodic Payments over loan life
- Loan partially amortized, leaving lump sum payment that falls
due termination day of loan period.

(c) Bullet loan
- Make Periodic Interest Payment over loan life.
- Make single Principal payment @ maturity.

(d) Mortgage loan
- Finance structure purchase
- Example: home, office building, apartment, etc.
- Particular asset served as collateral
IF borrower fails to make payment, lender will take the ownership
of particular property.
- Lower interest rate as compared to equivalent risk loan wth
no collateral
- Interest _base_d on fixed or floating rate

(e) Medium term notes
- Sold to investors through investment banks.
- Mostly unsecured: issuers are usually large & reputable as
evidenced by their credit worthiness
- Maturity from 9 months to 10 years.
- Registered with Security Exchange Commission (SEC)
- Offer flexibility to borrower
- similar to bonds

(f) Equipment financing
- Equipment (asset) used as collateral to secure a loan.
- Marketable euipment or purchasing such equipment
- Maturity > 1 year
- Repayment schedule set in keeping with equipment economic life.
- Lender ensure equipment market value > Loan Amount
- 2 Sourches:
i. Chattel Mortgage
-> Mortgage on specific assets other than land & buildings.
-> Lender got lien on specific equipment.
-> If borrower fails to pay, lender can sell the equipment.
ii. Pledge
-> Possession is transferred to lender but _title_ remains with
borrower
-> Example: Stocks & Bonds

(g) Bond financing
- Long-term debt contracts in: which
Issuer (borrower) promises to repay buyer (lender) the original
principal + interest at periodic intervals.
- Promise Agreement between issuer & buyer to trade current cash flow
with expected future cash flow.
- Issuer promises to pay future cash flow in the form of
coupon interest payments & principal payment for current cash flow
(bond price).
- Value of Bond @ Current Period =
Value of Expected Cash Flow (Coupon Interest + Principal)

3. A town bank usually provides term loans that require repayment in a series
of equal installments. If an RM2 million loan is made, what will be the
annual end of the year payment if the interest rate is 10% on the loan? The
maturity of the loan is 5 years.

PMT = PVA/(PVIFA)i=10%,n=5
= 2 Million/(3.7908)
= RM 527,593.12

4. Set up an amortized table for a loan amounting RM2 million over a 5 years period
for the following conditions:
(a) Annual equal payment with interest rate of 10% on the remaining unpaid
balance.
(b) Annual equal principal reduction and interest rate is charged on the remaining
unpaid balance.
(c) Set up amortized loan schedule for bullet loan.

Refer

5. Firm XYZ is undertaking a long-term investment project that requires an
initial investment of RM5 million. To fund this project, the firm arranges
a secured longterm loan maturing in 5 years time. The bank will charge a
10% interest rate on the unpaid balance over the maturity period. The first
repayment of the loan will start at the end of year one. What should be the
annual installment that the firm needs to provide the lender?

PMT = PVA/(PVIFA)i=10%,n=5
= 5 Million/(3.7908)
= RM 1,318,982.80

6. 6. Assume that you are buying a Mercedes Benz from UMW Malaysia with an onthe-
road price of RM250,000. UMW Malaysia also arranges a long-term loan that
will charge 5% interest per year. You are required to pay RM20,000 as a down
payment.
(a) Determine the annual installment if you are taking a 7 year term repayment
plan.
(b) What will be the annual installment be if you are taking a 10 year terms
repayment plan.

Refer

7. Percahaya Limited Bhd. issued a 20 years callable bond. The bond was issued
5 years ago with a coupon interest rate of 12% per year, and a face value
of RM1,000. The company reserves the right to call off the bond after 15
years from the date of issue with a call premium of RM100. The required
return to bond holders is 10%. What is the price of the bond today if the
company calls-off the bond 5 years before the maturity?

Call Price (CP) = Principal + Premium
= 1,000 + 100
= RM 1,100

C = 1,000 * 0.12
= RM 120

n = 15 Years - 5 Years = 10 Years

Pb = C (PVIFA i=10%, n=10) + CP (PVIF i=10%, n=10)
= 120 (6.1446) + 1,100 (0.3855)
= 737.352 + 424.05
= RM 1,161.402

8. Write brief notes on the following:
(a) Indenture provision
- Contract between the issuer and the bondholders specifying the
issuer’s legal requirement.
- Investors need to be aware of some of the provisions that allow the
issuer to call-off the contract before its maturity date.
- The indenture provision highlights the lender’s right to put-off the
bond at a specified price prior to the maturity.

(b) Types of bonds
(i) Coupon Bearing Bonds
(ii) Zero Coupon Bonds
(iii) Junk Bonds
(iv) Callable/Put-able Bonds

(c) Why some bonds are sold at premiums and others sold at discount prices?

The return a bond must offer in order to be a worthwhile investment.
Required yield is set by the market and sets the precedent for how
current bond issues will be priced.

- If Coupon Rate higher than Required Yield
Bonds sold at Premiums;

- If Required Yield higher than Coupon Rate
Bonds sold at Discount Prices.

The investor acquiring the bond to be compensated for the lower
coupon rate in the form of accrued interest.
If the bond is not priced at a discount, investors will not purchase
the issue because its yield will be lower than that of the market.

Introduction

Any business needs information about how it is operating in comparison to its competitors to survive and thrive. It is not enough to just know what your own sales are from year to year. A decrease in your sales could simply be a function of a decrease in the entire market for your product or service. Alternatively, a decrease in sales compared with your competitors could mean that serious trouble is brewing. Calculating your market share allows you to determine where you stand in your industry. You should calculate your market share on a regular basis as part of your ongoing internal reporting, at least annually, but preferably more often.
Instructions
Difficulty: Moderately Easy
Calculating Market Share

Things You'll Need

* Calculator
* Industry statistics
* Your company's financial statements

Steps 1
Step One
Obtain as much information as possible about the products or services you sell in your area of service. For example, if you sell microchips nationwide, you will need to know how many microchips get sold in the country annually and what the total revenues are for those sales. If you provide lawn care service in your county, you will need to know what consumers in your county spend on lawn care services. If you deal in an industry with many private companies, you may find it somewhat difficult to obtain this information. Research industry groups and business organizations to find out what statistics they have available for your industry. Start with the Chamber of Commerce.

Steps 2
Step Two
Calculate your market share once you have the relevant statistics. There are two ways to calculate your market share, each of which may give you a different result. The first calculation would be _base_d on number of products. For example, if there were 147,000 microchips sold in the United States last year and your company sold 11,200 of them, your market share would be equal to 11,200 divided by 147,000 or 7.6%. That means that your company sold 7.6% of all the microchips sold in the United States last year. The second method of calculation is _base_d on revenues. If the total spent by consumers on lawn care services in your county last year was $312,000 and your revenues last year were $43,600, then your market share would be $43,600 divided by $312,000 or 14%. Calculating _base_d on units and revenues will give you different results where competitors are selling their goods and services for different prices. You will need to decide which measure gives you the best results for your particular industry. In general, products are measured _base_d on units and services are measured _base_d on revenues.

Steps 3
Step Three
Keep track of your market share over time. If you see distinct changes to your market share, find out what is causing it. A decrease in market share could mean that you are losing business to competitors. An increase in market share means you are picking up business but you need to ensure that it is profitable business. Monitoring your market share is an important bellweather to warn you of upcoming trouble.

What Does Dividend Payout Ratio Mean?
The percentage of earnings paid to shareholders in dividends.

Calculated as: = Yearly dividend per share
Earnings Per share

or equivalently:
= Dividend
Net Income

Inventory loan use your inventory to secure a loan.

Inventory loan financing (also known as "Flooring") is the leveraging of inventory using the value of the financed equipment or stock as collateral for the loan. Lenders want to make sure their loans are secure, so this method will improve the chances of getting financed drastically.

Inventory loan financing is a method commonly used when a distributor or reseller needs additional credit and payment terms longer than 30 days in order to maintain a complete stock of inventory for immediate customer availability. Lenders and savvy business people realize that running out of inventory will do nothing, but drive customers away from a business. That is why more and more lenders are willing to allow a business to use their current stock of inventory as collateral for future loans.

A benefit of using this sort of loan is the increase credit capacity _base_d on security in financed inventory/equipment. It also allows distributors and resellers to stock inventory with extended payment terms. Working capital position for the business is also increased. Another extremely important benefit is that it does not count against the customer's credit line.

Have a good plan in place before you speak with a lender about your inventory loan options. Conduct a search in our free business capital search engine today to uncover a matched list of lenders that are ready to help finance your business.