Financial Management - 1

Assignment

Name : Ankit Singh

Class : BBA(P)2
 Question : 1
What is meant by credit rating ?
A credit rating is a quantified assessment ,the creditworthiness of
a borrower in general terms or with respect to a particular debt or
financial obligation. A credit rating can be assigned to any entity
that seeks to borrow money—an individual, corporation, state or
provincial authority, or sovereign government. Credit ratings
apply to businesses and government, while credit scores apply
only to individuals. Credit scores are derived from the credit
history maintained by credit-reporting agencies such as
Equifax, Experian, and TransUnion. An individual's credit score is
reported as a number, generally ranging from 300 to 850.
Similarly, sovereign credit ratings apply to national governments,
while corporate credit ratings apply solely to corporations. Credit
ratings for borrowers are based on substantial due
diligence conducted by the rating agencies. While a borrowing
entity will strive to have the highest possible credit rating since it
has a major impact on interest rates charged by lenders, the
rating agencies must take a balanced and objective view of the
borrower’s financial situation and capacity to service/repay the
debt.
 Question : 2
What is the purpose of credit rating?
Credit ratings for borrowers are based on substantial due
diligence conducted by the rating agencies. While a borrowing
entity will strive to have the highest possible credit rating since it
has a major impact on interest rates charged by lenders, the
rating agencies must take a balanced and objective view of the
borrower’s financial situation and capacity to service/repay the
debt.
A credit rating not only determines whether or not a borrower
will be approved for a loan but also determines the interest rate
at which the loan will need to be repaid. Since companies depend
on loans for many startup and other expenses, being denied a
loan could spell disaster, and a high interest rate is much more
difficult to pay back. Your credit rating should play a role in
deciding which lenders to apply to for a loan. The right lender for
someone with perfect credit likely will be different from someone
with very good, or even poor credit.
Credit ratings also play a large role in a potential investor's
determining whether or not to purchase bonds. A poor credit
rating is a risky investment; it indicates a larger probability that
the company will be unable to make its bond payments.
It is important for a borrower to remain diligent in maintaining a
high credit rating. Credit ratings are never static; in fact, they
change all the time based on the newest data, and one negative
debt will bring down even the best score. Credit also takes time to
build up. An entity with good credit but a short credit history is
not seen as positively as another entity with the same quality of
credit but a longer history. Debtors want to know a borrower can
maintain good credit consistently over time.

Question : 3
What is Sebi and its function?
Securities and Exchange Board of India (SEBI) is a statutory
regulatory body entrusted with the responsibility to regulate the
Indian capital markets. It monitors and regulates the securities
market and protects the interests of the investors by enforcing
certain rules and regulations.
SEBI was founded on April 12, 1992, under the SEBI Act, 1992.
Headquartered in Mumbai, India, SEBI has regional offices in New
Delhi, Chennai, Kolkata and Ahmedabad along with other local
regional offices across prominent cities in India.
The objective of SEBI is to ensure that the Indian capital market
works in a systematic manner and provide investors with a
transparent environment for their investment. To put it simply,
the primary reason for setting up SEBI was to prevent
malpractices in the capital market of India and promote the
development of the capital markets.
The functions and powers of SEBI have been listed in the SEBI
Act,1992. SEBI caters to the needs of three parties operating in
the Indian Capital Market. These three participants are mentioned
below:
 Issuers of the Securities: Companies that issue securities are
listed on the stock exchange. They issue shares to raise funds.
SEBI ensures that the issuance of Initial Public Offerings (IPOs)
and Follow-up Public Offers (FPOs) can take place in a healthy
and transparent way.
 Protects the Interests of Traders & Investors: It is a fact that
the capital markets are functioning just because the traders
exist. SEBI is responsible for safeguarding their interests and
ensuring that the investors do not become victims of any
stock market fraud or manipulation.
 Financial Intermediaries: SEBI acts as a mediator in the stock
market to ensure that all the market transactions take place
in a secure and smooth manner. It monitors every activity of
the financial intermediaries, such as broker, sub-broker,
NBFCs, etc
 Question : 4
Define loan syndication.
Loan syndication is the process of involving a group of lenders in
funding various portions of a loan for a single borrower. Loan
syndication most often occurs when a borrower requires an
amount too large for a single lender to provide or when the loan
is outside the scope of a lender's risk-exposure levels. Thus,
multiple lenders form a syndicate to provide the borrower with
the requested capital
The agreements between lending parties and loan recipients
often need to be managed by a corporate risk manager to reduce
misunderstandings and to enforce contractual obligations. The
primary lender conducts most of this due diligence, but lax
oversight can increase corporate costs. Company legal counsel
may also be engaged to enforce loan covenants and lender
obligations.
When a project is unusually large or complex, it may exceed the
capacity of a single lender. For example, the amount of
the loan may be too large, the risks too high, the collateral may be
in different locations, or the uses of capital may require special
expertise to understand and manage it. In these cases, a financial
institution may bring other lenders into the deal.
 Question : 5
What do you mean by GDR?
A global depositary receipt (GDR) is a bank certificate issued in
more than one country for shares in a foreign company. A
global depositary receipt (GDR) is very similar to an American
depositary receipt (ADR). It is a type of bank certificate that
represents shares in a foreign company, such that a foreign
branch of an international bank then holds the shares. The shares
themselves trade as domestic shares, but, globally, various bank
branches offer the shares for sale. Private markets use GDRs to
raise capital denominated in either U.S. dollars or euros. When
private markets attempt to obtain euros instead of U.S. dollars,
GDRs are referred to as EDRs.
Investors trade GDRs in multiple markets, as they are considered
to be negotiable certificates. Investors use capital markets to
facilitate the trade of long-term debt instruments and for the
purpose of generating capital. GDR transactions in the
international market tend to have lower associated costs than
some other mechanisms that investors use to trade in foreign
securities.

Global Depository Receipt (GDR) is an instrument in which a

company located in domestic country issues one or more of its
shares or convertibles bonds outside the domestic country. In
GDR, an overseas depository bank i.e. bank outside the domestic
territory of a company, issues shares of the company to residents
outside the domestic territory. Such shares are in the form of
depository receipt or certificate created by overseas the
depository bank.

Question : 6
What is the difference between credit rating and
credit score ?
Lenders use your credit score to determine creditworthiness, so
knowing your score is essential, whether you're planning a major
purchase or applying for your first credit card. A credit rating
serves as a business tool, compiled by a recognized credit-rating
agency. Lending institutions use the ratings to determine the level
of risk associated with an individual debt issue for a corporation
or government entity.
The terms credit rating and credit score might be used
interchangeably in some cases, but there is a distinction between
these two phrases. A credit rating, often expressed as a letter
grade, conveys the creditworthiness of a business or government.
A credit score, usually given as a number, is also an expression of
creditworthiness that can be used for businesses or individual
consumers.
Certain credit scores (for instance, the Dun & Bradstreet PAYDEX,
Experian’s Intelliscore Plus, or the FICO LiquidCredit Small
Business Scoring Service) apply exclusively to businesses.
As a consumer, your credit score is a number based on
information from your credit reports at the three major credit
reporting bureaus—Equifax, Experian, and TransUnion. When it
comes to applying for a personal loan, a mortgage, or a new credit
card, you’ll be interested in your personal credit score.
Both ratings and scores are designed to show potential lenders
and creditors a borrower’s likelihood of repaying a debt. They are
created by independent third parties, rather than by creditors or
consumers. These services are paid for by the entity requesting
the credit score as well as by the creditor.
 Credit ratings are expressed as letter grades and often used
for businesses and governments.
 Credit scores are numbers most often used for individuals.
 An individual’s credit score is based on information from the
three major credit reporting agencies and scores range from
300 to 850.
 A FICO (commonly used) score takes information from all
three major credit bureaus to credit an individual’s credit
score.
 Credit ratings are produced by credit rating agencies, such as
Standard and Poor's.
 Question : 7
A company needs Rs. 5,00,000 for purchase of a new machinery. The following
three financial plans are feasible:
(a) Issue of 30,000 shares at Rs. 10 per share;
(b) Issue of 20,000 shares at Rs. 10 per share and issue of 2,500 debentures at Rs. 100 per
debenture which would carry interest at 8%.
(c) Issue of 10,000 ordinary shares at Rs. 10 per share and 2,500 preference shares at Rs.
100 per share which bear dividend rates of 8%.
Assumptions:
(i) Company’s earnings before interest and tax (EBIT) would be Rs. 60,000 p.a. after
the purchase of new machinery.
(ii) Income-tax rates at 50%.
Which alternative would you recommend and why?
Solution – Statement Showing the EPS under different Financial Plans
A B C
Plan Rs. Rs. Rs.
EBIT 60,000 60,000 60,000
Less : Interest - 20,000 -
PBIT(Profit Before Tax) 60,000 40,000 60,000
Less : Tax @50% 30,000 20,000 30,000
PAT(Profit after Tax) 30,000 20,000 30,000
Less : Pref.Dividend - - 20,000
Profit available to Equity 30,000 20,000 10,000
shareholders
No.of Equity shares 30,000 20,000 10,000
EPS Rs.30,000 Rs. 20,000 Rs.10,000
30,000 20,000 10,000
= Rs.1 =Rs.1 =Rs.1

Hence, EPS of Plan A , Plan B and Plan C are coming same .