İŞLETME FİNANSI II

Internal cash flow is generated from retained earnings and depreciation.

The long-term financial requirement means the finance needed to acquire land and building for business concern, purchase of plant and machinery and other fixed expenditures. Long-term loans (payback period over 5 years, up to about 30 years such as for mortgage credits.

The bank overdraft is based on the same principle as the revolving loans, but the limit of the credit is set as a debit of a company’s current account. If the limit is overdrawn, the borrower pays a penalty interest rate. Loans are granted by financial institutions after a client presents anapplication form.

Other fees and charges are determined depending on the type of loan and on the lender. Arrangement fees are commitment or administration charges payable to the lender to reserve the funds. Fees will vary depending on the complexity of the business, its size, and risk. Interest is charged and will vary dependingon risk of default.

The main differences between debt and equity are the following:

• Debt is not an ownership interest in the firm. Creditors do not generally have votingpower.

• The corporation’s payment of interest ondebt is considered a cost of doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible.

• Unpaid debt is a liability of the firm. If itis not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued.

The decision to issue security in the form of debt or stock depends on the optimal capital structure of a corporate. The capitalization of a company can be defined as the balance sheet value of stocks and bonds outstanding. In this framework, capital structure refers to the kinds of securities and the proportionate amounts that make up capitalization.

A Eurobond is a bond issued in multiple countries but denominated in a single currency and those bonds have become an important way to raise capital for many international companies and governments. A Eurobond was once defined as a debt instrument underwritten by an international syndicate and offered for sale immediately in a number of countries. Eurobonds are issued outside the restrictions that apply to domestic offerings and are syndicated and traded mostly from London. However, trading can and does take place anywhere there are buyers and sellers.

The financial management of a company requires the management of funds’ uses as well as optimizing the funding of those uses. The uses of cash flows are for net working capital and others and also for capital expenditures. In order to fund those uses, there exist two types of cash sources. Internal cash flow is generated from retained earnings and depreciation. External cash flow is generated from short-term borrowings and long-term debt and equity finance. As can also be understood from the information given, “short-term borrowings” , “long-term debt” and “equity finance” are the cash sources which external cash flow is generated from, so the correct answer is E.

For funding investments and/or other cash uses by medium and long-term sources, the companies have four different alternatives. These are generally in the forms of bank borrowing, borrowing from special institutions, debt issuance and equity finance, securitization. Furthermore, depending on the peculiarities of the funding needs leasing can be another source of medium and long-term financing. Additionally, the internal sources such as Retained Earning and Depreciation provide financing to the corporate. As can also be understood from the information given “Retained Earning” and “Depreciation” are the internal sources which provide financing to the corporate, so the correct answer is B.

According to the type of drawing and paying back, the loans are categorized as classical, revolving credits, bank overdraft, project loans, and syndication loans.

As can also be understood from the information given “the bank overdraft” is based on the same principle as “the revolving loans”, so the correct answer is B.

Securities issued by corporations may be classified roughly as equity securities or debt securities. The main differences between debt and equity are the following:

As can also be understood from the information given, the statements in the options; I, II, III and V are correct, so the correct answer is D. The statement “Dividends paid to stockholders are tax deductible.” is not correct, because dividends paid to stockholders are not tax deductible.

The following factors are considered while deciding the capital structure of the firm:

The following factors affect the cost of capital of a company:

As can also be understood from the information given, “Nature of the business”, “Size of the company”, ”Legal requirements” and “Requirement of investors” are the factors affect the cost of capital of a company, so the correct answer is E. “Desired Level of Leverage” is considered together with the cost of capital  while deciding the capital structure of the firm.

Debt securities are typically called notes, debentures, or bonds depending on their peculiarities. Despite the fact that a bond is a secured debt, it generally refers to all kinds of secured and unsecured debt. The difference between notes and bonds is the original maturity. Issues with an original maturity of 10 years or less are often called notes, longer-term issues are called bonds.

As can also be understood from the information given the statements “Debt securities are typically called notes, debentures, or bonds depending on their peculiarities.”, “Long-term debt can be issued in two different forms, public-issue and privately-placed.” and “Although the major terms and conditions are the same, under privately placed issues all of the bonds are sold to a single lender, not offered to the public.” are correct, so the correct answer is C.

The statements “Issues with an original maturity of 10 years or less are often called bonds” and “Longer-term issues are called notes.” are not correct. . Issues with an original maturity of 10 years or less are often called notes, longer-term issues are called bonds.

The par value of a bond is almost always the same as the face value, and the terms are used interchangeably, so the correct answer is A.

Common stock, also named as equity shares, represnts equity or an ownership position in a corporation.

Collateral is a general term that frequently means securities that are pledged as security for payment of debt.

A lease is a contractual agreement between a lessee and lessor establishing that the lessee has the right to use an asset and in return must make periodic payments to the lessor who is the owner of the asset.

The bond indenture is a legal document. It can run in several hundred pages it generally includes the following provisions:

As can also be understood from the information given, the correct answer is E. The bond indenture generally includes all the provisions given in the options.

Common stock is the most common security to provide finance for the corporate. This way of financing has the following disadvantages:

Irredeemable: Common stock cannot be redeemed during the lifetime of the company. Over capitalization is a very costly phenomenon financially so all companies must search for optimum capital structure.

Obstacles in management: Common stock holders can put obstacles in management by manipulation and organizing themselves. The managers may use their power in such ways that are against the wealth of the shareholders.

Limited income to investor: The investors who desire to invest in safe securities with a fixed income have no attraction for equity shares.

Loss of leverage contributions: When the company raises capital only with the help of equity, the company cannot take advantage of leverage

“Irredeemable”, “Obstacles in management”, “Limited income to investor” and “Loss of leverage contributions” are disadvantages of common stock, so the correct answer is E. “No fixed dividend payment obligation” is one of the advantages of common stock.

Advantages of common stock are as follows:

Permanent sources of finance: Common stock is a long-term permanent nature of sources of finance; hence, it can be used for long-term or fixed capital requirement of the business.

No fixed dividend payment obligation: The issuance of common stock does not create any obligation to pay a fixed rate of dividend. If the company earns a profit, owners are eligible for profit, they are eligible to get dividend otherwise, and they cannot claim any dividend from the company.

Lower cost of capital: Cost of capital is the major factor, which affects the value of the company. A company with a strong capital base can secure funding less costly as the capital base is considered as a buffer for risks buy the debtors.

Retained earnings: When the company have more share capital, it will be suitable for retained earning which is the fewer cost sources of finance while compared to other sources of finance.

Retained earnings are another method of internal sources of finance and it is basically an accumulation of profits by a company for its expansion and diversification activities. The advantages of retained earnings are stated below:

As can also be understood from the information given the statements in the options I, II, III and V are correct, so the correct answer is D.

The statement “When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is more expensive than the other sources of finance.” is not correct, because “when the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance.” Hence the value of the share will increase.