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Assignment Questions:
Q-1. What are some of the major sources of short-term financing, and how are interest rates on these loans quoted? How do firms develop a short-term financing plan that meets their need for cash? ( 5 Marks – 400 to 500 words )
Q-2. Solve the following questions:-
(A)- Create the statement of sources and uses of cash from the following entries:
( 2.5 Marks )
(B)- Energetic, Inc. believes that it can acquire Satisfied Industries and improve efficiency to the extent that the market value of Satisfied will increase by $5 million. Satisfied currently sells for $20 a share, and there are 1 million shares outstanding.
1. Satisfied’s management is willing to accept a cash offer of $25 a share. Can the merger be accomplished on a friendly basis?
2. What will happen if Satisfied’s management holds out for an offer of $28 a share?
( 2.5 Marks )
Q-3 . Describe the basic differences between mergers, leveraged buyouts, management buyouts, divestitures, and spin-offs. ( 2.5 Marks- 300 to 400 words )
Q-4 – How can options, futures, and forward contracts be used to devise simple hedging strategies? Discuss similarities and differences between futures contracts and forward contracts. ( 2.5 Marks- 300 to 400 words )
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ANSWERS:
Q1/ There are external sources of financing, which are the sources that come from outside the organization through the head of finance. External financing is divided into long-term and short-term. Examples of short-term are leasing and lease purchase, and long-term such as grants, shares, bank loans and bonds.
The main sources in the field of short-term financing are: secured loans, commercial papers, a specific type of promissory note, commercial credit, commercial bank loans.
Q2.A/
Particular | $ |
Sources: | |
Increased Payables | 45 |
Increased long-term debt | 200 |
Cash from Operation: | |
Net Income | 1,000 |
Depreciation | 60 |
Total Sources: | $1,305 |
Uses: | |
Increased Inventory | 80 |
Increased Receivables | 100 |
Increased Fixed Assets | 475 |
Dividends Paid | 600 |
Total Uses | $1,255 |
Q2.B1/ Current market value Satisfied industries
= 1 million share * $20 = $20 million
Market value after take over
= $20 million + $5 million = $25 million
As a result of the market value after the merger being equal to the offer price, it will be a friendly merger, as this will happen if $25 per share is offered with the satisfaction of the management.
Q2.B2/ The acquisition will be hostile if management remains satisfied that the value of one share is $28, because the required value is greater than the value of the post-merger.
Q3/
Q4/
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