Assignment 1

Submitted by Group 4 (19016620-040,

-028, -051)

Submitted To Sir Adnan Bashir

Course Code MGT-418
Course Title Financial Markets
and Institutions
Class BBA 2 years 4 th

University of Gujrat
Toufeeq Brothers is a large manufacturing firm in Faisalabad that was created about 35 years
ago by Mr. Haji Muhammad Toufeeq. It was initially financed by with an equity investment by
the Toufeeq family and 10 others individuals. Over time, Toufeeq family has obtained
substantial loans from finance companies and commercial banks. The interest rate on the loan
is tied to market interest rate and adjusted every six months. Thus, Toufeeq Brothers cost of
borrowing is sensitive to interest rate movements. It has a credit line with the bank for obtain
of funds on urgent basis. It had purchased Treasury securities that it could sell if it faces any
liquidation problems.

It has assets valued at $10m and generates sales of $20m per year. Some of its growth is
attributed to its acquisition of other firms. Toufeeq Brothers hopes to do so i.e. expansion by
acquiring other businesses. It expects that it needs substantial long term financing and plans to
borrow additional funds by loans or by bonds. It is also considering issuing of stocks to raise
funds in the next year. Toufeeq Brothers monitors conditions in the financial markets that could
affect its cash inflow and cash outflow and ultimately affects its values.

Q1) How might Commercial Banks facilitate Toufeeq Brothers

expansion?
In collective, commercial banks are the leading depository institution. They serve surplus units
by offering an extensive variety of deposit accounts, and they transfer deposited funds to
deficit units by providing direct loans or purchasing debt securities. Commercial banks serve
both the private and public sectors; households, businesses, and government agencies utilize
their deposit and lending services. Businesses need money to operate and grow. They also
sometimes require additional funds for big purchases, and their assets might be tie up in
inventory or expensive equipment. Loans will help Khatri Company purchase supplies, real
estate, and vehicles necessary for operations on the business owns assets that can be pledge as
collateral.

Q2) why might Toufeeq Brothers have limited access to additional debt
financing during its growth phase?
Debt financing occurs when a firm raises money for working capital or capital expenditures by
selling debt instruments to individuals or institutional investors. In return for lending the
money, the individuals or institutions become creditors and receive a promise that the principal
and interest on the debt will be repaid. Toufeeq brothers relies heavily on commercial banks for
loans. When the company is firstestablish with equity funding from its owners, Toufeeq
brothers could easily obtain debtfinancing because of the backup by the firm’s assets. While
expanding, Toufeeq brothers continually relied on extra debt financing, which led to increase in
the debt of thecompany. This resulted into less and less number of banks willing provide debt
financing.

Q3) If financial markets were perfect how this might have allowed
Toufeeq Brothers to avoid financial institution
If financial markets were perfect, it might allow Toufeeq brothers to avoid financial institutions
by being able to avoid the help of investment banks when it issued stocks.

It would have been able to obtain loans directly from surplus units. It would have been able to
access potential targets for acquisitions without the advice of investment securities firms. It
would be able to engage in a new issuance of stock or bonds without the help of a securities
firm

How Toufeeq Brothers is exposed to moral hazard problem

Moral Hazard is the risk that a party has not entered into a contract in good faith or has
provided misleading information about its assets, liabilities, or credit capacity.

Moral Hazard can exist when a party to a contract can take risk without having to suffer
consequences.

There is a huge drawback for Toufeeq Brothers is that they have taken loan from commercial
banks and they are adjusting their interest rate in every six months. In actually they are
misleading the commercial institutions.

They were exposed in Moral Hazard in this way they were issuing stocks to raise their funds for
next year and in actually they have no asset value for issuance of stock.

And secondly they were showing their assets that they not. In this way they were exposed in
Moral Hazard.

They were misleading the both parties financial institutions and shareholders also.