FM 2 ASSIGNMENT

1. Do you agree with the statement “investment and financing decisions are different faces of the
same coin” Give your reasons for your agreement or disagreement

Answer: - yes I agree. This means because, Investment and financing decisions are different
faces of the same coin. This statement means that investment decisions, such as deciding what
projects to invest in, and financing decisions, such as how to raise the funds to pay for those
investments, are closely related

2. What are the different short term financial sources? Discuss the advantages of each of them
Answers
1. Trade credit,
2. Letter of credit
3. Bank Finance
4. Commercial papers
5. Accrued expense,
6. Differed Revenues
Advantages. Resilience, less risky, easy to obtain

Disadvantages . Mature more frequently, costly

3. What is the difference between preferred stock and common stock? Explain the pros and cons
of each of them.

Difference: - Common stock investments have a potentially larger reward, but also come with
more risk because they're exposed to the market. Preferred stock investments are a safer
investment with fixed-income dividends, but investors may miss out on a share's appreciation
they would get with common stock.

COMMON STOCK & PREFFEREDSTOCK

1. COMMON STOCK Cons

Pros

Voting rights High volatility

Higher capital gains potential Higher capital risk

Dividend payouts are not

May be paid dividends
guaranteed
2. PREFFEREDSTOCK
Pros Cons

Fixed-income payments No voting rights

Lower capital risk Lower capital gain potential

Paid dividends before common stockholders Dividend payouts are not guaranteed

Paid assets before common stockholders Asset payouts are not guaranteed
4. Explain the different types of long term debt? What are the advantages and disadvantages of
financing with debt?

The most common types of long-term debt or liabilities are: Bank debt - This is a liability where
a company borrows money from its bank. Mortgages - It is a liability that a company takes for
property ownership. Bonds - A company usually chooses such liability to fund a large or
important project.

Adv. The advantages of debt financing include lower interest rates, tax deductibility, and flexible
repayment terms. The disadvantages of debt financing include the potential for personal liability,
higher interest rates, and the need to collateralize the loan

5. Generally there are two ways of financing our firm. When do you think we should use debt
and when do you think we should use Equity?

1. debt and 2.equity.

 When…..debt Want to retain control of your company. Debt lenders aren’t looking
for control, just stable revenue, credit history or a credit score, and your ability to meet
your interest payments.
 Need funding fast. Digital debt lenders can fund you in a matter of days so you can start
investing to generate revenue quickly.
 Can’t afford to spend more. Debt will cost you only interest. Once you’ve paid back
your loan, you’re done. There’s no long-term profit sharing involved.

 Shift your focus from scaling a company to building a business. You may have started
out with venture scale in mind, but now you prefer to build a prosperous business and
focus on generating cash flow.

 Equity is no longer available. For example, debt financing can help you manage your
startup during a downturn and keep you default alive by extending your runway.

 When equity…. Are a new business. During seed and angel rounds, equity is your best
option because you won’t have enough creditworthiness, cash flow or collateral to
 finance with debt. Angel investors won’t care how many assets you have on your balance
sheet. They want to see the potential of your business and the possibility of high ROIs.

Plan on rapid growth. Equity allows for greater innovation to fail, learn, and succeed fast
because you’re not focused on generating revenue.

. Want business partners who can help you grow quickly. Many investors can act as mentors,
guiding you to success

 Have more time. Equity takes more time than it used to. Discerning investors will want

to explore the viability of your business before committing.

6. What is lease financing? What are the different types of lease in Ethiopia? Explain the
advantages and disadvantages of lease financing

Lease financing is a popular medium and long-term financing option in which the owner of an
asset grants another person the right to use the asset in exchange for a periodic payment. The
asset’s owner is known as the lessor, and the user is known as the lessee. A contract is to be
made between the lessor and the lessee regarding the terms and conditions of the lease. After
the lease period is over, the asset goes back to the lessor (the owner). There can also be a
provision in the contract regarding compulsory buying of the asset by the lessee (the user) after
the lease period is over.

Lease of land in Ethiopia, as we discuss, can be classified in to housing, urban land (ground land
lease) and rural (agricultural) land lease. Since buildings are privately owned lease or rent of
houses is based on freedom of contract than some social policy, as favored by many western
countries.

Advantage and disadvantages

A. To Lessor he following are the benefits of lease financing from the perspective of the
lessor:
B. Regularly Assured Income: Lessors receive lease rentals by leasing an asset for the
duration of the lease, which is a guaranteed and consistent source of income.
C. Ownership Preservation: ecause the lessor owns the asset, the lessor receives a tax
benefit in the form of depreciation on the leased asset.
D. Tax Advantage Leasing is a highly profitable business because the rate of return on
lease rentals is much higher than the interest paid on the asset’s financing.
E. Profitability is high: here is a lot of room for growth here. Because leasing is one of
the most cost-effective forms of financing, demand for it is steadily increasing

to Lessee: The following are the benefits of lease financing from the perspective of the lessee:
 Capital Goods Utilization: A business will not have to spend a lot of money to acquire an
asset, but it will have to pay small monthly or annual rentals to use it. The business can use
its funds for other productive purpose.
 Tax Advantages: Lease payments can be deducted as a business expense, allowing a
company to benefit from a tax advantage.
 Cheaper: Leasing is a form of financing that is less expensive than almost all other
options.
 Technical Support: Regarding the leased asset, the lessee receives some form of
technical support from the lessor.
 Friendly to Inflation: Leasing is inflation-friendly because the lessee is required to pay a
fixed amount of rent each year, even if the asset’s cost rises.
 Ownership: After the primary period has expired, the lessor offers the lessee the
opportunity to purchase the assets for a small fee.
Disadvantages:
To Lessor: The following are the disadvantages of lease financing from the perspective of the
lessor:
 In the event of inflation, it is unprofitable: Every year, the lessee receives a fixed amount
of lease rental, which they cannot increase even if the asset’s cost rises. So, it is
unprofitable during inflation.
 Taxation twice: It is possible to be charged sales tax twice: The first is when the asset is
purchased, and the second is when the asset is leased.
 Greater Risk of Asset Damage: As the ownership is not transferred, the lessee treats the
asset carelessly, and there is a great chance that it will not be usable after the primary lease
period ends.
B. To Lessee: The following are the disadvantages of lease financing from the perspective of
the lessee:
 Compulsion: Finance leases are non-cancelable, and lessees must pay lease rentals even if
they do not intend to use the asset.
 Ownership: Unless the lessee decides to purchase the asset at the end of the lease
agreement, the lessee will not become the owner of the asset.
 Costly: Lease financing is more expensive than other types of financing because the lessee
is responsible for both the lease rental and the expenses associated with asset ownership.
 Asset Understatement: As the lessee is not the owner of the asset, it cannot be included in
the balance sheet, resulting in an understatement of the lessee’s asset.