Divesh

PGP/24/387

Financial Markets and Instruments

Assignment-1

Q1. What are the advantages and disadvantages of retained earnings? (Ch-17, Q7)

Advantages - The retained earnings are readily available and infuse additional equity to the firm
which requires no issue cost and ensures no dilution of control.

Disadvantages - These earnings are limited and leads to loss of dividends by shareholders. Also,
easily availability of equity leads the company to invest in bad projects.

Q2. How do various instruments of long-term financing compare? (Ch-17, Q13)

The following table shows the comparison between various long-term financing instruments:

Type of Financing Issuing Cost Dilution of Control Risk Restrictive Conditions

Equity Capital High Yes Nil No
Equity
Retained Earnings Moderate No Nil No
Hybrid Preference Capital Moderate No Nil No
Term Loans Low No High Moderate
Debt
Debentures Low No High Low

Q3. What are the tasks of the manager of a public issue? (Ch-18, Q7)

The prime task of a public issue manager includes critical examination of the issue, preparation,
finalization and submission of draft prospectus, marketing of issue using conferences and
advertising. He also coordinates various team units and ensures the demat credit and dispatch of
share certificates after the allotment in given timeline and monitor the issue during subscription
period.

Q4. What is the difference between private placement and preferential allotment? (Ch-18,Q17)

The following table shows the major difference between the private placement and preferential
allotment:

Private Placement Preferential Allotment

 Shares offered to selected group of persons  Shares offered to existing shareholders
not exceeding 200 and outsiders as well
 Company can issue shares in cheque,
 Company can issue shares in cash
demand draft etc but not in cash
 Valuation report is not mandatory  Valuation report is mandatory
 Minimum subscription of 20,000 of the face
 No minimum subscription is required
value is mandatory

Q5. What are the types of appraisal done by financial institutions? (Ch-18, Q21)

The following types of appraisals are done by the financial institutions:

 Market Appraisal- Assessment of demand projection and market infrastructure adequacy

 Divesh
PGP/24/387

 Technical Appraisal- Assessment of technical aspects like manufacturing process, raw materials,
plant and equipment, machinery, site etc
 Financial Appraisal- Assessment of the reliability on cost, expenses, future revenues and
profitability of the project
 Economic Appraisal- Calculates economic rate of return, effective rate of protection and
domestic resource cost
 Managerial Appraisal- Assessment of technical and managerial staff, schedule, staffing and
renumeration

Q5. Interpretation of any interesting information relevant to PC chapter 17 from one of the latest
financial newspaper (within 100 words with source mentioned clearly as reference)

https://www.business-standard.com/article/companies/reliance-capital-defaults-on-interest-
payments-to-hdfc-axis-bank-120030301233_1.html Accessed on 25th August, 2020

Reliance Capital Ltd. used term loan instrument from HDFC and Axis Bank. HDFC and Axis bank had
extended a loan of 523 crore and 100 crores respectively which demands interest payments from
the borrower. However, due to the decision by Delhi High Court on 20 th November, 2019 prohibited
the company to transfer, encumbering or disposing the possession owned by the company leading
to delays in debt interest payment. The total financial debt on the company including long-term and
short-term borrowings is around 11,955 crores.

Q6. Interpretation of any interesting information relevant to PC chapter 18 from one of the latest
financial newspaper (within 100 words with source mentioned clearly as reference)

https://economictimes.indiatimes.com/industry/banking/finance/sidbi-venture-capital-looks-to-tap-
lic-sbi-pnb-for-rs-750-crore-new-horizons-fund/articleshow/77021868.cms Accessed on 25th
August,2020.

SIDBI venture capital (subsidiary of Small Industrial Development Bank of India) is planning to
include Life Insurance Corporation, Punjab National Bank, State Bank of Indi and Bank of Baroda in
investing 750 crore funds in early growth and mid stage start-ups working in the consumption
sector, agro-technology, green technology, drinking water and sanitation.

Around 75% of the early stage start-ups, dependent upon the foreign investment, are highly
impacted by the Covid-19 outbreak. Hence, venture capital like SIDBI are helping these start-ups for
initial investment to initiate their business and inclined to bear high risk expecting a high profit
margin.