NAME: GLORIA AKOSUA ATISO

INDEX NUMBER: 00830220

PROGRAM: BBA

COURSE : INTRODUCTORY TO FINANCE

QUESTION 1(A).

TYPES OF SHORT-TERM LOANS

A short-term financing is the type of financing acquired for short period of time usually for periods
less than one year. The need for short term loan arises to finance the current assets of a business
such as inventory of raw materials and finished goods, debtors, minimum cash and bank balance.
Short term financing is also known as working capital financing. They are available in the form of the
following:

1. Commercial Paper: This refers to a short-term unsecured debt obligation that is issued by
financial institutions and large corporations as an alternative to raise funds generally for a
period of time up to one year. It is also known as unsecured promissory note
2. Factoring: This is a financial transaction in which a company sells its receivables to a
financial company called a factor. The factor then collects payments on the receivables from
the company`s customers.
3. Invoice discounting: This is a process in which a business sells an invoice to a third party,
usually a financing company. This is a common method used for businesses that do not want
to or cannot wait for their clients to pay their bills.
4. Counter Trade: This is the exchange of good ands services for other goods and services.
Counter trading can be direct or indirect. It is a structure where buyers import equipment,
machinery from foreign manufactures on credit terms and agrees to pay back their debt
with other product and services.
5. Line of credit: This is a kind of financing that is extended to an individual, corporation or
government entity by a bank or other financial institution. This type of credit is different
from term loans such as housing mortgages or car loan.

B. Inventory financing is credit obtained by businesses to pay for product that are not intended for
immediate use. Therefore, in conclusion, it is very much important for A&B ltd to be advised to use
commercial paper as it is a form of short-term financing especially designed to help small businesses
buy the inventory they need and when they need it and also for payrolls. Commercial paper is based
on the strength of a company`s sales it will also enables A&B Ltd to better control cashflow and keep
more of its own capital.

Question 2

A. Time Value of Money: This is a basic concept that holds that money in the present is worth
more than the same money you have received in the future. This is because the money that
 you have right now can be invested and earn a return, thus creating a larger amount of
money in the future.
B. Risk And Return: This refers to the potential financial loss or gain experienced through
investments in securities or stock. For instance, an investor who has gained a profit in a said
to have seen a return on his or her investment.
C. Risk: The risk of an investment denotes the likelihood that the investor could see or lose
money.
D. Sensitivity Analysis: This is also known as what-if analysis or the what-if simulation exercise.
It is generally used by financial analysts to predict the outcome of a specific action when
performed under certain conditions. Sensitivity analysis can be used to study the effect of
change in interest rates on bond prices.

Question 3.
The Overview of Financial Markets.
Financial markets from the name itself are types of market place that provides an avenue for
the sale and exchange of assets such as bonds, stocks, foreign exchange, and derivatives.
They are often times called capital markets. Businesses and investors can go to the financial
markets to raise money to grow their businesses and to make more money respectively.

There are numerous financial markets, and every country is home to at least one, although
they vary in size. Some financial markets are small while others are internationally known,
such as the New York Stock Exchange (NYSE) that trades trillions of dollars on daily basis.
Here are some types of financial markets;

1. Stock Market: The stock market trades shares ownership of public companies. Each
share comes with a price, and investors make money with the stock when they perform
well in the market. It is easy to buy stocks but the actual challenge is in choosing the
right stock that will earn money for the investor.
2. Bond Market: The bond market offers opportunities for companies and government to
secure money to finance a project or an investment. In a bond market, investors buy
bonds from a company, and the company returns the amount of the bonds within an
agreed period of time in addition to interest.
3. Commodities Market: The commodities market is where traders and investors buy and
sell natural resources or commodities such as corn, oil, meat, and gold. A specific market
is created for such resources because their price is unpredictable.
4. Derivatives Market: This type of market involves derivatives or contracts whose value is
based on the market value of the asset being traded.

The Role of Financial Market

The role of financial market in the success and strength of an economy cannot be underestimated.
Here are four relevant roles of a financial market:

1. Determine the price structure of securities: Investors seek to make profit from their
securities however unlike goods and services whose price is determined by the law of
demand and supply, prices of securities are determined by financial markets.
 2. Makes financial assets liquid: Buyers and sellers cab decide to trade their securities or stocks
anytime. They can use financial markets to sell their securities or make investments as they
desire.
3. Lower the cost of transaction: In financial markets, various types of information regarding
securities can be acquired without the need to spend.
4. Putting saving into more productive use: Financial markets like banks open up to individuals
and companies that need a home loan, student loan, or business loans.

Two (2) Importance of financial market:

1. Financial markets provide a place where participants like investors and debtors, regardless
of their size receive fair and proper treatment.
2. They provide individuals, companies and government entities with access to capital.

Question 4

Finance can be defined as the management of money which includes activities such as borrowing,
investing, lending, budgeting, saving and forecasting.

A. The two main sources of finance are:

Short term source of finance: This refers to funds available for short periods of time. In most
company`s short term financing is also known as shirt term borrowing and it is for a period
of year. Examples of short-term sources of finance are factoring, bank overdraft, commercial
paper, trade credit, invoice discounting etc.

Long-term sources of finance: These are capital requirements for a period of more than five
(5) years to 10, 15 20 years or maybe more depending on the other factors. For instance,
expenditures in fixed assets like plant or machinery, land and building of businesses are
funded using long-term sources of funds. Examples of long-term sources of funds are;
debenture/bonds, venture funding, share capital or equity, retained earnings.

B. Financing the building of a new warehouse would require huge sum of money since it is a big
project. The benefit of this warehouse financing will generate more profit as well as improve
the performance of the company in many years to come hence a long- term financing is
required. Long term financing will enable to obtain funds with servicing for more than a year
usually from 5 to 20 years or more. Long term loans are payable during the lifetime of a
company.

Question 5

A. A weak form efficiency is the weakest form of market efficiency hypothesis model. This
generally refers to a market where share prices fully and fairly reflect the past
information. In such a market, it is not possible to make abnormal gains by just studying
past share price movements. Thus, technical analysis cannot be used to predict and beat
the market. For instance, capital markets are weak form efficiency.
 Semi Strong form efficiency: This refers to a market share where share prices fully and
fairly reflect all publicly available information in addition to all past information. In this
kind of market, it is also not possible to make unusual gains by studying publicly
available information such as financial press, company financial statements and records
of past share prices. Meaning both fundamental and technical analysis cannot be used
to beat the market and achieve heights.

Strong form efficiency: This refers to a market where share prices fully and fairly reflect
not only all publicly available information and all past information but also all private
information (insider information) as well. It is also known as inside trading. However,
insider information cannot give an investor an advantage over the market.

Therefore, with the recent situation with regards to company A, insider trading has a
strong form market efficiency because it is legal.

B. The division managers and the CEO have absolute different goals and objectives. The
CEO has incentives thus taking more risk projects where as managers may be
shareholders with quiet different interests.

For that matter I will not adapt the same criteria this is because each party`s interest and
participation towards the company must be respected in order to reduce conflicts. Coming up with
access performance theory and transparency theory to help access and compensate less talented
managers in the firm. In order words, I will use the pay-for performance system to decide on who
gets what because deciding to pay the CEO high because of title means paying the less talented or
average CEO high.