8th SEMESTER CAPITAL INVESTMENT QUESTION BANK NOTES

BY SURAJ SHAH(28)

10 Mark Question
1. Discuss the concept of warranty and convertible along with their
feathers. Point out the reasons for issuing warranty and convertibles.

Warranty refers to a guarantee made by a manufacturer or seller of a product, explicitly stating that
the product will function or operate correctly for a specific amount of time. It is a written or implied
contract between the manufacturer and the customer, assuring the customer that if the product
fails during the warranty period due to defects or malfunctions, the manufacturer will provide a
repair, replacement or refund.

Some of the features of warranty are:

1. Duration: Warranty can vary in length from a few months to several years, depending on the
product type and manufacturer's policy.

2. Coverage: Warranty covers only those defects or malfunctions, which arise from normal use of
the product. Any other damage caused by negligence, abuse or unauthorized use is excluded.

3. Conditions: Warranty often comes with certain conditions, which must be fulfilled to claim the
warranty. These conditions may include proper installation, use and maintenance of the product,
proper packaging, and timely reporting of the defect.

On the other hand, convertibles refer to financial instruments, which can be converted into another
form of security, usually equity in the issuing company. Convertibles are hybrid securities, which
have features of both debt and equity. They pay a fixed rate of interest, like a bond while also
providing the option to convert it into common stock of the issuing company at a pre-determined
price.

Some of the features of convertibles are:

1. Conversion price: Convertibles come with a pre-determined conversion price, which is usually
higher than the current market price of the stock. It provides an incentive for investors to hold the
security and convert it into equity.

2. Conversion ratio: Convertibles also have a conversion ratio, which indicates the number of shares
an investor is entitled to receive upon conversion.

3. Call and Put options: Convertibles may also come with call and put options, allowing the investor
to buy or sell the security at a fixed price, depending on the market conditions.

The main reasons for issuing warranties and convertibles are:

1. To increase sales: Offering a warranty can increase customer confidence and hence sales.
Convertibles can also increase investor interest and demand for the company's securities.

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2. To reduce risk: Warranties can provide protection against unforeseen defects or malfunctions,
reducing the manufacturer's risk of lawsuits or recalls. Convertibles can provide a lower-risk
investment option as compared to equity investments.

3. To raise capital: Convertibles are a popular way for companies to raise capital, as they offer a mix
of debt and equity features. Warranties can also help raise capital by offering extended payment
terms or deferred payment options.
In summary, warranties and convertibles are both financial instruments that provide benefits to
both the issuer and the investor or customer. They offer protection against risks and can help raise
capital or increase sales.

2. What is capital structure? Explain the factor effective the capital

structure.

Capital structure refers to the mix of financing sources, such as equity, debt, and hybrid securities,
that a company uses to fund its operations and investments. It is the composition of a company’s
liabilities, including short-term and long-term debt, equity, and retained earnings.
Here are 10 factors that can affect a company’s capital structure:

1. Business risk - Companies that operate in industries with high levels of uncertainty and volatility
may prefer a lower debt-to-equity ratio to avoid the risk of defaulting on their debt obligations.
2. Tax considerations - Debt financing is tax-deductible, whereas dividend payments on equity are
not. Therefore, companies may prefer debt financing to benefit from the tax shield it provides.
3. Cost of capital - The cost of borrowing can vary based on the issuer's creditworthiness, the level
of interest rates in the market, and the term of the borrowing. Companies must balance the benefits
of using debt financing against the cost of borrowing.
4. Growth plans - Companies with ambitious growth plans may prefer equity financing over debt
financing to avoid the risk of overleveraging and to maintain flexibility and liquidity.
5. Market conditions - The availability of financing sources and the state of the capital markets can
affect a company's capital structure decisions.
6. Shareholder preferences - Shareholders may prefer a specific mix of debt and equity financing,
depending on their investment objectives, risk tolerance, and tax situation.
7. Financial flexibility - Companies may prefer to maintain a mix of debt and equity financing to have
financial flexibility during uncertain economic times.
8. Asset structure - If a company's assets are easily convertible into cash, it may take on more debt
to finance its operations.
9. Access to funding - A company's access to funding sources, such as banks or the capital markets,
can impact its capital structure decisions.
10. Corporate governance - A company's corporate governance policies and practices can also affect
its capital structure decisions, as a company with strong corporate governance may be more
attractive to investors and lenders, allowing it to access cheaper sources of capital.

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In summary, a company's capital structure reflects its financing choices and can impact its risk
profile, tax liabilities, and cost of capital. A variety of factors come into play when making capital
structure decisions, including business risk, tax considerations, cost of capital, growth plans, market
conditions, and the preferences of shareholders and lenders.

3. What are the causes of financial Distress? Explain with example.

There are various causes of financial distress, and here are 10 of them:

1. Lack of cash flow: A lack of cash flow can occur when a company has more outflow than inflow
of cash, which can cause missed payments, accumulated interests, and eventually, financial distress.

2. High levels of debt: When companies or individuals take on too much debt, they may find it
difficult to service their debts, which can lead to financial distress. If the situation is not managed
well, it can cause bankruptcy or insolvency.

3. Economic Downturns: An economic downturn can have a significant impact on businesses and
individuals, resulting in low income, job losses, or decreased revenue, which can cause financial
stress.

4. Poor financial management: Poor financial management or inadequate financial planning can
lead to overspending, lack of budgeting, and incorrect investment decisions. Companies or
individuals that fail to manage their finances well can find themselves in financial distress.

5. Competition: Increased competition can lead to reduced market share, lower profits, and
revenue, which can put a strain on a company's financial resources.

6. Natural disasters and catastrophes: Natural disasters such as hurricanes, earthquakes, or

pandemics can disrupt business operations, leading to a lack of revenue, customers, and cash flow.

7. Regulatory changes or legal issues: Regulatory changes or legal issues can cause companies or
individuals to incur expenses, face penalties, or lose income. These can lead to financial distress.

8. Technological changes: Technological changes can lead to the adoption of new processes or
gadgets that can result in additional costs, reduced sales or revenue, and financial stress.

9. Mismanagement of accounts receivables: When companies fail to collect payment on time, or if

their clients go bankrupt, the accounts can become problematic, leading to financial distress.

10. Expansion or diversification failures: Expanding or diversifying a company may come with a lot
of risk. The company may find themselves low on capital, leading to issues of financial distress.

An example of a company that experienced financial distress due to poor financial management is
Worldcom, which was brought down by its executive's accounting fraud, which inflated its earnings,
ultimately leading to bankruptcy. Another example is Abercrombie and Fitch when their poor
expansion drive without proper research landed them in a situation of financial distress.

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4. Do business failure occur evenly over time which size of the form large
or small is more proved to business failure? Why

Business failures do not occur evenly over time. They are affected by a wide range of factors such
as the economic climate, competition, and industry-specific variables. However, studies show that
small businesses face a greater risk of failure compared to large businesses.

Small businesses are more prone to financial distress as they have limited resources and face many
challenges, including a lack of capital, narrow margins, and fewer employees to distribute tasks.
This makes it difficult for small businesses to overcome unexpected expenses or changes in the
market. According to the Small Business Administration (SBA), only about half of small businesses
survive past the five-year mark.

On the other hand, large businesses may have access to more resources to help them weather
unexpected expenses or changes in the market. For example, large companies typically have a more
diversified customer base and product lines, which can help to mitigate losses if one product or
market is underperforming.

Despite this, large businesses are not immune to failure, as the closure of well-known companies
such as Toys’R’Us and Sears has demonstrated. Factors such as disruptive technology,
mismanagement, and global events beyond a company’s control can all lead to the downfall of even
the largest and most successful companies.

In summary, while business failures do not occur evenly over time, small businesses may be at a
greater risk of financial distress due to their limited resources and challenges. However, large
businesses are not immune to failure, as they too can be affected by a wide range of factors that
impact their financial stability.

5. Discuss the meaning and consequences of financial Distress in briefly

Financial distress is a term used to describe a company’s inability to meet its financial obligations,
and it usually occurs when a company’s income is insufficient to cover its expenses. This can lead to
a range of serious consequences that can threaten the viability of a business. Some of the
consequences of financial distress include:

1. Reduced Access to Financing: Companies facing financial distress are seen as risky borrowers by
lenders and investors, hence, such companies may find it hard to secure financing for their
operations, which further exacerbates their financial woes.

2. Legal Problems: When companies are unable to meet their financial obligations, they may face
legal actions taken against them by creditors or suppliers, which can result in costly legal battles.

3. Decreased Cash Flow: Companies facing financial distress may find it difficult to generate enough
cash flow to fund their operations or pay their employees, which can lead to a decline in employee
morale and productivity.

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4. Reputation Damage: Financial distress can be a signal of underlying structural issues and can cast
doubt on the company's ability to operate effectively, which can damage its reputation and brand
image.

5. Bankruptcy: In severe cases, financial distress can eventually lead to bankruptcy, which is a legal
declaration that a company is unable to pay its debts.

In summary, financial distress is a serious issue that can lead to significant consequences for a
business. It is essential to monitor a company's financial health regularly and seek help if necessary
to prevent financial distress from snowballing into a crisis.

6. Briefly discuss the concept of efficient capital market.

Efficient capital market is a market where all available information is reflected in security prices,
which means that all investors have equal access to information and are able to process it and make
decisions quickly. In an efficient capital market, the information is reflected in the price of securities
so quickly that it is almost impossible for any individual or group to consistently generate returns
that are higher than the market average.

The concept of efficient capital market forms the basis of modern finance theory and has Important
implications for investors. It suggests that any attempt to achieve above-market returns is unlikely
to succeed in the long run, and investors should focus on investing in a diversified portfolio of
securities.

Efficient capital markets also have important implications for corporate finance. Since information
is reflected in stock prices so quickly, companies must act quickly to address any changes or
developments that might negatively impact their stock prices. This means that companies need to
be transparent and communicate clearly with investors in order to avoid negative consequences
from the efficient capital market.

In summary, efficient capital markets are markets where all available information is reflected in
security prices making it almost impossible for any individual or group to consistently generate
returns that are higher than the market average.

7. What do you mean by capital structure? Point out the factor affecting
the capital structure of a firm.
Capital structure refers to the way a company finances its operations and growth through the use
of various types of financial instruments such as equity, debt, and hybrids securities. It is the
combination of different sources of funds that are available to the company, and it reflects the
proportion of each source of long-term capital such as retained earnings, debt, and equity that is
used by the company.

Factors affecting the capital structure of a firm include:

1. Size of the Company: Larger companies can typically access more sources of funding and have
less reliance on any one type of capital.

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2. Industry of the Company: Capital structure can differ based on the industry the company operates
in.

3. Business Cycle: During a downturn, companies tend to reduce their reliance on debt and opt for
equity financing.

4. Leverage: A company's debt level can affect its capital structure decisions. High levels of debt can
make it more difficult for a company to obtain more debt financing but may make equity financing
more appealing.

5. Assets: A company's assets can affect the types of financing it seeks, such as a company with
assets that can be used as collateral may be more likely to obtain debt financing.

6. Risk: Investors typically prefer companies with less risk, so companies with lower risk may have
an easier time raising capital through debt financing than those with higher risk.

7. Owner's Preferences: The owner's preference for debt and equity financing can also influence the
company's choice of capital structure.

8. Explain the use of DU point equation with numerical example.

The DuPont equation, also known as the DuPont model or DuPont analysis, is a financial ratio
analysis method that breaks down the return on equity (ROE) into various components to help
understand the factors driving profitability. It is a way of looking at how effectively a company's
management team is using its assets to generate profits.

The DuPont equation is calculated as follows:

ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Shareholders' Equity)

Where:

- Net Income = the company's total profit

- Sales = the total revenue generated by the company

- Assets = the total value of the company's assets

- Shareholders' Equity = the total value of the shareholders' equity

The formula can be broken down into three components:

1. Profit Margin: (Net Income / Sales) represents the company's ability to generate profits from its
sales revenue.

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2. Asset Turnover: (Sales / Assets) represents the efficiency of the company in using its assets to
generate sales revenue.

3. Financial Leverage: (Assets / Shareholders' Equity) represents the extent to which the company
relies on borrowing to finance its operations.

Let's take an example to illustrate how the DuPont equation works.

Suppose a company has the following financial information:

- Net Income = $100,000

- Sales = $1,000,000

- Assets = $500,000

- Shareholders' Equity = $200,000

Using the DuPont equation, we can calculate the ROE as follows:

ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Shareholders' Equity)

ROE = ($100,000 / $1,000,000) x ($1,000,000 / $500,000) x ($500,000 / $200,000)

ROE = 0.10 x 2 x 2.5

ROE = 0.5 or 50%

This means that the company is generating a return of 50% on the shareholders' equity. We can
analyze the factors contributing to this return by breaking down the components of the DuPont
equation:

- Profit Margin = Net Income / Sales = $100,000 / $1,000,000 = 0.10 or 10%

- Asset Turnover = Sales / Assets = $1,000,000 / $500,000 = 2

- Financial Leverage = Assets / Shareholders' Equity = $500,000 / $200,000 = 2.5

Therefore, based on the DuPont analysis, we can conclude that the company's strong ROE is due to
its high profit margin (10%), efficient use of assets to generate sales (2), and moderate reliance on
financial leverage (2.5).

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9. Explain the difference between equity share and preference share.

Equity share and preference share are both types of shares issued by companies to raise capital.
However, there are differences between the two types of shares, which are as follows:

1. Ownership: Equity shares represent ownership in the company and give shareholders a right to
participate in the management of the company by voting at shareholder meetings. On the other
hand, preference shares do not represent ownership in the company and do not provide the right
to vote at shareholder meetings.

2. Dividends: Equity shareholders are entitled to receive dividends as per the company's dividend
policy after all the statutory dues are paid. The company is not obligated to pay dividends to equity
shareholders. However, dividends payable on preference shares are fixed and paid out to
preference shareholders before equity shareholders.

3. Risk: Equity shareholders bear a higher risk than preference shareholders, as they are the last in
line to be paid in case of liquidation or bankruptcy of the company. Preference shareholders, on the
other hand, have a preference in receiving their investment back before the equity shareholders in
case of the liquidation or bankruptcy of the company.

4. Redemption: Equity shares are perpetual in nature, which means they do not have a fixed
redemption period. However, preference shares can have a redemption period, which means that
the company may choose to buy back the preference shares from shareholders at a pre-determined
price after a fixed period.

5. Convertibility: Equity shares are not convertible into any other form of security or instrument.
Preference shares may be convertible into equity shares or other securities as per the terms agreed
at the time of issue.

In summary, equity shares represent ownership in the company and carry higher risk, whereas
preference shares do not represent ownership in the company, are less risky, and provide fixed
dividends.

10. Explain the feature of warrants.

Warrants are financial instruments that give the holder the right to purchase a specific number of
securities at a fixed price within a specified period. Warrants have several features that make them
unique from other financial instruments. Here are some of the key features of warrants:

1. Exercisability: The holder of a warrant can exercise their option to buy the underlying asset at a
fixed price within a specified time frame. If they do not exercise their option within that time frame,
the warrant is said to have expired.

2. Pricing: Warrants are typically issued at a price above the market price of the underlying asset.
This difference between the market price and the warrant price is known as the "premium." The
premium is the cost of the warrant and is determined by the company issuing the warrants.

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3. Leverage: Warrants provide investors with leverage, as they can be purchased at a fraction of the
cost of the underlying asset. As a result, warrants can offer investors a higher potential return on
investment.

4. Transferability: Warrants can be bought and sold independently of the underlying asset, and the
holder of a warrant can sell the warrant to another investor without selling the underlying asset.

5. Time Frame: Warrants typically have a fixed time frame, after which they expire if they are not
exercised. The time frame can range from a few weeks to several years, depending on the terms of
the warrant.

6. Dilution: Warrants can lead to dilution of existing shareholders' equity if they are exercised. This
is because when warrants are exercised, new shares are issued, which can decrease the value of
existing shares.

In summary, warrants are a unique financial instrument that can provide investors with leverage
and the opportunity for a higher return on investment. They have a fixed price, time frame, and
premium, and can be bought and sold independently of the underlying asset. However, they can
also lead to dilution of existing shareholders' equity.

11. Explain the failure of convertible preferred stock.

Convertible preferred stock is a type of investment that combines the features of both equity and
debt. It is preferred stock that can be converted into common stock at a predetermined rate, usually
at the option of the investor. The conversion provides the investor with the opportunity to
participate in the growth potential of the company’s common stock while still receiving the regular
income of preferred stock.

However, convertible preferred stock can fail for a number of reasons:

1. Incorrect pricing: The conversion rate of the preferred stock into common stock may not be
properly set, leading to the preferred stock being overpriced or underpriced. If it is overpriced,
investors may not want to convert their shares, and the company may be left with expensive debt.
If it is underpriced, investors may convert their shares too quickly, leading to dilution of the
company's stock.

2. Market conditions: If the market conditions change, the conversion rate may no longer be
attractive to investors. For example, if the market price of the common stock drops, investors may
not want to convert their shares, reducing the attractiveness of the preferred stock.

3. Company performance: If the company does not perform as expected, the conversion rate may
not be attractive to investors. For example, if the company's revenues are lower than expected,
investors may not be willing to convert to common stock.

4. Changes in the company's capital structure: If the company issues more shares of common stock
or preferred stock after issuing convertible preferred stock, the conversion rate may be impacted.

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This can lead to dilution of the preferred stock or it being converted at a price inferior to what the
investor expected.

5. Investor preferences: investors may prefer to have the certainty of regular preferred stock
dividends and may not want to convert to common stock.

In summary, convertible preferred stock can fail due to incorrect pricing, changing market
conditions, poor company performance, changes in the company's capital structure, and investor
preferences. It is important for companies to carefully consider their capital structure and investor
preferences when issuing convertible preferred stock.

12. What is warrant explained it briefly?

A warrant is a type of financial instrument that gives the holder the right, but not the obligation, to
buy a certain number of shares of a company’s stock at a predetermined price, known as the strike
price, before the expiration date of the warrant.

Warrants are often issued in conjunction with other securities, such as bonds or preferred stock, as
a way to make those investments more attractive to investors. For example, a bond with a warrant
attached allows investors the opportunity to benefit from any appreciation in the company’s stock
price, in addition to the yield on the bond.

Warrants can be traded on securities exchanges, just like stocks, and their value fluctuates based
on the price of the underlying stock, the strike price, and the time left until expiration.

Investors who hold warrants have the ability to buy the underlying stock at a predetermined price,
which can potentially be lower than the current market price, providing an opportunity for profit.
However, if the price of the underlying stock does not exceed the strike price before the warrant
expires, the warrant holder may not exercise the warrant, resulting in loss of the investment.

Overall, warrants offer investors the opportunity for potential upside in the value of the underlying
stock, but also present risk if the stock price does not perform as anticipated.

13. Discuss the concept of efficient capital market .

The efficient capital market theory is a concept in financial economics that suggests that the market
value of securities reflects all available information. In other words, it is a market where all available
information is impounded into stock prices and quickly reflected in their prices. Therefore, it’s
impossible to consistently achieve returns in excess of average market returns.

According to the Efficient Market Hypothesis (EMH) three forms of efficiency exist such as weak
form efficiency, semi-strong form efficiency and the strong-form efficiency. Weak form efficiency
means current security prices represent all security price history while semi-strong form efficiency
claim that all publicly available information about a security is already reflected in its price. The final

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form, strong form efficiency, asserts that all information, both public and private, is incorporated
into security prices.

So, in an efficient market, it is believed that it is impossible to outperform the market as a whole or
achieve returns in excess of average market returns, except by chance or by taking on additional
risk. Investors, analysts, and academics alike use this concept to make investment decisions and
understand how markets operate.

However, critics of the efficient market theory suggest that the market is not always efficient,
arguing that market events such as crashes, bubbles, and other anomalies cannot be explained by
the theory. Additionally, behavioral finance theories argue that investors are not fully rational and
can be influenced by emotions, biases, and other factors that can lead to irrational decision making
in the market.

14. Discuss about bank ruptcy

Bankruptcy is the legal process where an individual or a company declares its inability to pay off
their debts to creditors. In other words, bankruptcy is a legal solution for debtors to get rid of their
financial difficulties and start afresh. The bankruptcy process involves a trustee or a court-appointed
official who manages the debtor’s assets and liabilities.

One example of bankruptcy is that of the global retailer Toys “R” Us. In September 2017, Toys “R”
Us, which had been in business for over 70 years, declared bankruptcy due to declining sales and
increasing competition from online retailers such as Amazon. The company had around $7.9 billion
in debt and was struggling to keep up with payments to its suppliers.

Toys “R” Us filed for Chapter 11 bankruptcy, which allowed the company to restructure its debt and
operations while continuing to operate its stores. The company closed hundreds of stores, laid off
thousands of workers, and focused on improving its online presence. However, despite these
efforts, the company was unable to recover and eventually announced that it would be closing all
its stores and going out of business once and for all.

The bankruptcy of Toys “R” Us serves as an example of how bankruptcy can be a difficult but
necessary process for companies that are struggling financially. Bankruptcy allowed the company
to restructure its debt and operations in an attempt to stay afloat, but ultimately, it was not enough
to save the company.

15. What is the expected theoretical value of variance 6 month hance?

To find the expected theoretical value of variance 6 months hence, we need to consider the formula
for calculating the variance.

Variance is the square of the standard deviation, and it is given by the formula:

Variance = (sum of (xi – x̅)^2) / (n-1)

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Where xi is the value of each data point, x̅ is the mean of the data, and n is the number of data
points.

To calculate the expected theoretical value of variance 6 months hence, we would need to know
the specific data set and the expected values of the data points for the next 6 months.

Without this information, it is impossible to calculate the expected theoretical value of the variance
6 months hence.

16. Point out the reason for issuing warrants and convertibles.

Issuing warrants and convertibles are common forms of financing for companies that need capital
to fund their growth or expansion plans. The main reasons for issuing warrants and convertibles are
as follows:

1. To attract investors: By offering warrants and convertibles, a company can attract investors who
may not be interested in investing in common stock or debt. Convertible securities offer a unique
investment opportunity that can appeal to a wider range of investors.

2. To raise capital: Companies can generate capital by issuing warrants and convertibles in exchange
for cash. This can help to finance growth, make acquisitions, or fund new projects.

3. To reduce the cost of financing: Warrants and convertibles can be issued at a lower cost of
financing compared to other forms of financing such as bonds or straight equity. This can be
beneficial to companies that need capital but are concerned about the cost of financing.

4. To provide flexibility: Warrants and convertibles can provide flexibility to both the company and
the investor. Convertibles allow investors to convert their securities into common stock at a later
date, while warrants can be exercised to acquire common stock at a specified price. This can provide
investors with the potential for higher returns, while giving the company flexibility in managing its
capital structure.

In summary, issuing warrants and convertibles can be beneficial to companies in raising financing,
attracting investors, reducing financing costs, and providing flexibility in managing their capital
structure.

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Very short Questions

1) What is discussion tree analysis?

Answer: Discussion tree analysis is a decision-making tool that uses a visual representation of a
decision-making process to map out the different options and their outcomes.

2) What is the difference between common stock and preference stocks?

Answer: Common stock represents ownership in a company and provides voting rights, while
preference stocks provide dividend payments but do not typically provide voting rights.

3) What is the cost of financial distress?

Answer: The cost of financial distress refers to the costs incurred by a company during a period of
financial difficulty, such as legal fees or lost business opportunities.

4) What is the operating cycle?

Answer: The operating cycle refers to the time it takes for a company to convert its inventory into
cash, including the time it takes to purchase inventory, sell it, and collect payment from customers.

5) What are mergers?

Answer: Mergers occur when two or more companies combine to form a single entity.

6) What is an operating lease?

Answer: An operating lease is a lease agreement that provides the lessee with the use of an asset
for a specified period of time without transferring ownership.

7) What does convertible mean?

Answer: Convertible refers to a security that can be converted into a different type of security, such
as a convertible bond that can be converted into common stock.

8) What is networking capital?

Answer: Networking capital refers to the difference between a company’s current assets and its
current liabilities.

9) What is a financial lease?

Answer: A financial lease is a lease agreement that provides the lessee with the use of an asset for
a specified period of time, after which the lessee has the option to purchase the asset.

10) What is the conversion ratio?

Answer: The conversion ratio is the number of shares of common stock that can be obtained by
converting a convertible security.

11) What is the quick ratio?

Answer: The quick ratio is a measure of a company’s short-term liquidity that excludes inventory
from current assets.

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12) What is the discounted payback period?

Answer: The discounted payback period is the amount of time it takes for a project to recover its
initial investment taking into account the time value of money.

13) What is the gas conversion cycle?

Answer: The gas conversion cycle is a thermodynamic process used in power generation that uses
natural gas to produce electricity.

14) What is the inventory conversion period?

Answer: The inventory conversion period is the amount of time it takes for a company to turn its
inventory into sales.

15) What is an efficient capital market?

Answer: An efficient capital market is a market where securities prices reflect all available
information about the companies issuing them.

16) What is the breakeven point?

Answer: The breakeven point is the level of sales at which a company generates enough revenue to
cover its expenses and make a profit.

17) What are warrants?

Answer: Warrants are securities that give the holder the right to buy a specific number of shares of
common stock at a specific price before a specified date.

18) What is the PBP?

Answer: The PBP, or payback period, is the amount of time it takes for a project to recover its initial
investment from cash inflows.

19) What is MOS?

Answer: MOS, or margin of safety, is a measure of a company’s ability to withstand adverse
economic conditions or unexpected changes in its business environment.

20) What is the solvency ratio?

Answer: The solvency ratio is a measure of a company’s ability to meet its long-term debt
obligations.

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