International Finance: Case Study Pt 1

welcome back everyone for today what we're going to do we will run through a couple of exercises we'll see how we can prepare for the exams how we can prepare for the for the tests and we're going to have a mock test for us uh just to help you understand what you can do for preparations and how you analyze the questions as they come what we're going to do basically we will have a case study and each case study is going to have its own unique set of questions some of them are going to be very much based on on the case study itself others are going to be a little hypothetical but also around the case study to test your knowledge and understanding of the material that we've been through that we've studied together for the past few weeks and for the very first case study that we have for ourselves for this week is one about a company an a food manufacturing company it's called Lombards and Lombards is basically a us-based company they've been doing really well have all the details about the case study in this slide so you can go through it you can read it at your own pace but in short Lombard is doing very well they're considering few financing options and what they're also considering is to expand their operations internationally they would like to go to Europe and they would like to have a base in Europe for themselves due to the uh good progress that they've been doing in the European market and with these details of course you can see some of the data of the financial data their debt to equity ratio you can see what their stocks were sold for and in the markets and how they've been traded uh you have all the data available here for you and so we are going to be using this data as we go through the questions the set of questions that we will start working on right now for us first things first let's start with the very first question so the first question here is asking us about how How likely is it for the company for Lombards to basically how easy for them is it going to be to benefit from issuing a preferred shares and so this question very much looks into your understanding of what preferred Shares are and how they could benefit an organization and so you will need to recall the material that you studied perhaps in the very first unit that we've done that we've that we've looked into together you'll also have to go deeper into the reading of of the first unit and so for us let's try to analyze this together and see how we can answer this question if we want to look at preferred shares what are some of the unique attributes of preferred shares you can look at the set of answers that we have right here and try to analyze these answers let's start first with basically having access to preemptive rights now if you remember from what we've been studying together and from your readings uh preemptive rights are basically rights that are associated to existing shareholders and so these new these existing shareholders basically have the right to acquire new shares that are issued by the company and before these Shares are issued to the public or offer to the public and so this very much is what preemptive rights are now if we want to look at answer number B which is basically access to declar dividence now the do you think that access to declar dividends is actually one of the attributes of preferred shares or perhaps is it an attribute of common shares now of course if we want to look at common shares here this is something else and basically common shares is very much associated with voting rights and that's why if you look at answer number D you will see that it represents what common Shares are if you look at answer number c which is basically about property rights this is mostly associated with creditors and so this is what you need to think about when you start analyzing the answers and what you have to remember is the attributes of the question itself and how it fits one of the answers that you have and based on the analysis that we've done together you can see very much that answer number B is the correct answer for us because preferred Shares are very much much all about dividends now to take another example and to take another question and try to answer it together and see how we can analyze again these answers together question number two is about Lombards thinking about issuing new shares and so because they are issuing new shares the question asks us about the role that the SEC would have in the process of issu of the in the process of issuance of new shares and here again let's start analyzing basically what the role of thec is if we want to take the the first answer so the first possible answer which is number eight it basically says that the the SE evaluates different merits of the Security's offering and if we really want to look at this now the evaluation criteria is not something related to the SEC so the SEC does not evaluate the merits of the Securities offering now similarly of course question number c now in question number c the SEC basically reviews the registration statements and tries to check the registration for compliance purposes and so it doesn't necessarily say if the investment is a good investment or not so this is not the role of the SEC now the other role that the SEC plays is basically the protection role for investors and so taking these into consideration you can see that question number B and the possible answer here number B is the correct answer so the SEC basically reviews the statements only and it doesn't have any extra authority to State whether this investment is a good investment or not does not evaluate the merits of the security and at the same time its role is is basically limited to the protection of investors themselves now if we move on to question number three and let's try to apply also this a similar reasoning question number three asks us about Lombards and thinking coming from a hypothetical perspective because as you can see from the merits of the question from the merits of the case the standings of Lombard the financial standings of Lombards is not going to place them in a position to be labeled as junk bonds this is again very much the general perspective and the general consensus from the merits of the case however this particular question and as we will see the next question both of them are very much hypothetical and trying to to to prompt you to think about junk bonds and see whether there is the possibility of something or of the bonds for lumbars to become junk bonds or not and so at this stage what we're trying to find out is your understanding of junk bonds and what junk bonds are really all about and so here what you need to do is to recall your unit number three and try to refresh your memory about it and about what junk bonds are what Rising Star bonds are because these are going to be basically what will help you answer this question let's take the first uh few answers answers a b and c now answer a is basically stating that a junk bond is one that has a high risk of default on paying the face value of the dividend now this is a little misleading as we will see also B and C are similarly misleading because junk bonds are not necessarily related to the face value or exactly to the uh to to the dividend we will see now the correct answer and how we can analyze and reach that correct answer if we go again to question to the possible answer number b or to basically what it says or what it states that junk bonds are high risk by nature and so because of the due to their high risk nature of default on paying and repaying the face value and the principle again this similarly to question a is a to possible answer number a is is a little misleading and is not does not accurately describe what junk bonds are and so same thing applies for number c however the correct answer as we can as we can see is number D and this is because when we talk about junk bonds these essentially have a high risk of default on payment of basically the principle and the interest rate so it is not associated directly to the dividend it's rather Associated to the interest rate and it's not directly Associated to the face value of the bond It's associated with the principle of the bond itself now following on from the previous question this is again another hypothetical question that does not necessarily does not necessarily mean that Lombards in is in that position or could be in that position however we're trying just to understand whether you and you have mastered your studies in terms of understanding the junk bonds and understanding the rising star bonds here what we're trying to find out is the possibility of a junk bond becoming a rising star Bond and for this we need to start analyzing and understanding what are the different perspectives that we have here and generally when we talk about junk bonds as we saw junk bonds are have a low credit rating by Nature due to their low credit rating said their credit rating basically their low credit rating stems from the fact that they have a high risk on of defaulting and because of this if we want to transform this junk bond into a rising star what we need to think about is how can we transform this high risk of default into something that could entice investors to be more to feel more secured in investing in that in this particular Bond and here as we can see the only way that we can do this is by playing around with our finances and strengthening our financial standing and so to strengthen our financial standing what we need to look into is how can we make this happen the best way based on the merits of the case that we have is through expanding through our operations that we have in the EU and this would help us access a new market and through the access to this new market we will equally have a good Financial record because we have a high demand on the products that this company has already in the European market and so from all these different answers that we have number D is the correct answer for this particular for this particular question now moving on if we look at question number five and here we're trying to understand whether whether why should Lombards BAS basically issue preferred stocks rather than opt for a different type of a financing option and this is very much all about preferred stocks so you need to recall your knowledge about preferred stocks and you need to understand what are the difference what are the different financing options available to to companies let's start with analyzing the different questions the different possible answers that we have and see which one applies to our case together now if we look at that's the first possible answer number a it states that basically because it allows Lombards to dilute the shares of uh other investors that preferred stocks is going to be something that investors will probably look into and at the same time it is most more suitable for Lombards however this is not accurate as we can see and as we understand from from from the material that we've been through share dilution is not necessarily something that presents profit to the to the company or basically that entices investors to invest in an organization and Shar dilution is very much related to a particular type of of of uh of stocks and this type of stocks is something that you will need to look and do some research on to find out what this particular stock is all about and then you probably be able to answer one of the following questions that we will have together now now if we look at answer number B as you can see B states that preferred stocks is basically one of the good options because it allows Lombards it allows the company to raise funds without necessarily inuring any debt now of course this is a quality of all different types of stocks because when you issue stocks and when you issue shares as an organization it is a type of equity financing rather than debt financing and so here what we're talking about is something that is a little bit General now if we go into question number c now question number c is basic if we go into answer number c so answer number C or the possible answer number c states that because preferred stocks allows Lomb bars to raise funds while having greater access to local investors again this is a quality of all different stocks and not necessarily it will grant you access to local investors exclusively because once you issue stocks and these stocks are traded in the stock market then basically your stocks are available to The Wider public and not to a very specific or Niche public a specific niche market for it and that's why this answer is inaccurate per se now the last possible answer uh that we have which is number D states that preferred stocks allows lanb bars to raise funds while having greater access to International investors again this is not necessarily accurate or not necessarily correct for the merits of the case because it doesn't only provide access to International investors but also here what we're looking we're looking at is that the fact that Lombard's Financial positioning allows it to basically oh I got stuck here sure just number D basically okay thank you H so far yeah it's good but I got stck again hopefully we won't have that again I forgot even which question this was I think this is number five yeah okay okay perfect I'm ready all right as we can see now the possible answer number T states that preferred stocks are one of the best options because it allows access to International investors now again again hypothetically this is not a an inaccurate statement because as with any type of stock issuance you have access to wider groups of of investors however if we go back to the merits of our case and if we look at the financial standings of our organization and we try to analyze that Financial standings and try to tie it down to B basically the question that we have which is issuing preferred stocks and why preferred stocks would be much more suitable versus other types of St versus other types of uh financing options whether Equity financing or debt financing we can see here that answer B is very much the most accurate answer for this particular case or for this particular question as we saw together it's not necessarily that the other answers are wrong or that you may have other answers that are wrong and there's only one right but you may have a series of right qu right answers however one of them would be more accurate and more suitable for the case based on the merits that you have on the case itself and you'll need to analyze and you'll need to always recall the merits of the case before you answer any particular question and so going back to our question here we can see based on the data that we have about Lombards due to their strong financial standing and it is a good option for them to continue on increasing their Equity financing or to finance their operations through Equity financing rather than debt financing you have to recall again their debt to equity financing uh numbers and this is presented to you in the case and there's again another question about the debt to equity ratio that we will go through together shortly in one of the subsequent questions now let's move on to the next question next question is asking you to place yourself as an investor and consider yourself investing in a particular Financial instrument that is issued by Lum parts now here you are considering whether you would like to invest in a floating rate bond or a fixed rate bond what do you think would be more suitable for you as an investor here again you are expected to recall the material that you learned from unit number four and basically you're asked to try to analyze the difference between floating rate bonds and between the fixed rate bonds and as if you remember from what fixed rate bonds is now a fixed Bond fixed rate bonds basically doesn't make any sense for you to invest in because if the interest rate is rising then there is no sense for you to invest in a a fixed interest rate a fixed rate bond now the reason behind this is and now again I'm losing my trail of thoughts thank you great let me go through those again just to see okay I think I'm ready let's go for us what we need to do we need to recall the unit number four try to analyze the difference between flow fixed rate bonds and floating rate bonds and try to see which one of these answers very much represents the correct answer based on the knowledge that we have about floating rate and fix rate boss so if we can look at the very first possible answer which is answer number a it it says that investing in fixed rate bonds is a good option because fixed rate bonds basically what they do they tend to perform better than traditional bonds now again this is somewhat misleading and you will be expected to have a deeper type of analysis as you go through this particular this particular question so you need to understand what are the Dynamics of fixed interest fixed rate bonds and understand how fixed rate bonds work so you need to recall that material as you answer this particular as you try to analyze this this particular question this particular answer similarly if you're thinking about question if you're thinking about the possible answer number B where you are again recommending to where you recommend to invest in in fixed rate bonds but here you state that because it repays higher yields of if the interest rate goes up again this is somewhat misleading why because of the dynamic of interest rate and how fixed rate work how fixed rate bonds work this does not really very much represent what fixed rate bonds is now if we go to number c what we're going to see is that the recommendation here is to invest in in floating rate bonds because floating according to this possible answer floating rate bonds will receive higher income even if the interest rate falls again this is not very much accurate because if we want to invest in floating grade bonds one of the very important things that we're going to get out of it is the fact that it would remove interest rate risk from the equation so it is going to help us hedge the interest rate risk and so this is why question at the possible answer number D is the correct answer in this scenario moving on to the sixth to the seventh question here you are asked to assume yourself as you're working with Lombards on issuing an IPO and as you're issuing an IPO here you are asked to think about the different financial institutions that are helping you as an organization so helping you as Lombards in facilitating this IPO what you're expected to do here is to recall all the DAT all the details about unit number two and how IPOs are issued now if you remember there are different groups that are associated with the issuance of bonds with the underwriting of these with the issuance of stocks and with with the underwriting of these of the initial public offerings and what you'll need to remember is what are these different financial institutions that are involved in in IPOs and as you can see central banks central banks do not have any role active role that they play Within the issuance of within the initial public offering similarly insurance companies and Retail Banks they don't have any role in that matter so therefore the correct answer is basically investment Banks now moving on to the next question you will see that lombar is trying to assess the efficiency of it of the market and here what we're trying to look into is the efficient market hypothesis and trying to understand what are the differences between efficient markets and inefficient markets and so this is very much all related to unit number four and what you need to do is to recall the material that we studied there together and the material that you've read and that you've done research on so that we are able to answer this particular question so here the question is asking us about the possible scenarios that could lead to inefficient markets now if you would remember from what we've what we've worked on together efficient market hypothesis is very much related to the sharing of information in the market that would allow us to basically have either efficient markets inefficient markets or semi efficient markets and based on the type of data or the type of information that is shared about the organization in the market and normally when we discuss or when we want to see how the shift from efficient markets into inefficient markets happen the thing that we need to look into or the the the the variable that we need to look into is basically information a symmetry and that's why question the the possible answer number D is the correct answer among the others it's not very much related to lack of buyers nor is it related to the lack of sellers or lower transaction costs these variables are are absolutely wrong and they have no role in this uh in in this in this question and so the main focus for efficient markets and to understand efficient markets is basically information on its own and keep this in mind as you try to recall all the data that we studed together in number four now moving on to the next question here what we're trying to understand is again the situation that lumbars could have a strong Market hypothesis and so again if we want to have a strong Market hypothesis we'll need to recall unit number four again and try to understand and try to understand all the different material that we have about unit number four and about the market hypothesis and if we remember from the market hypothesis we are here trying to understand basically what kind of information is the information that would have a stronger influence on the market to make the hypothesis or to make the market hypothesis strong rather than weak now the type of information here or from the different suggestions that we have and number a uh what we have is sharing of non-public information number B is the sharing of information in general so that would include public and non-public information so private information and public information in number c what we have is just looking at the price talks to the price stocks and see how they are reflected and in number c in number D what we're looking at future future stock prices and how they're reflected again today so C and D are very much looking into stock pricing which is a little Irrelevant for what we're looking into and so these two answers or possible answers could be discounted now what we are left with are qu our possible answer number a and number B and among those though number a is not necessarily wrong because part of having a strong Market hypothesis is the sharing of non public information what to have a strong Market hypothesis we also need to sh we also need to counter in the public information that is available and so this is why number B is the most accurate answer among between b and a so not necessarily that a is a wrong answer but it is not as accurate as number B because what we need to counter in for a strong Market hypothesis is all information to be countered in into the stock price so this includes private and public data now if we move on to the next question here what we're doing the question basically is asking you to look at to assume that you're working with lumbars on issuing a bond and what you need to uh do is basically look at some of the measures that would resemble the process associated with Bond issuance now this is very much all about Bond issuance and again you need to recall unit number one to help you answer this particular question and as you do this you have to start analyzing in the same way that we analyze all the different answers for the previous questions as well so if we look at the first possible answer here it says that you will start with showcasing your showcasing the showc in in in Road shows so the bonds will be placed in Road shows in the beginning and then they'll be placed in markets and after this they will be rated by rating agencies if you go into the possible answer number B which is again it states that the bonds are going to be placed in the markets and then after this they will be showcased in Road shows and then finally they'll be rated by rating agencies C on the other hand states that you will start with the rating agencies first then you'll go to Roach show and then finally you'll place them in the market D states that you will start with rating agencies then you'll place them in the market and then they will be showcased in in in Road shows now here what you need to do is recall the process of how bonds are issued and based on the data that we have based on the based on all the information that we've shared together through through our uh sessions and through the reading material that you have you can see that number c is the most accurate answer for this particular question now if we're thinking about uh the next question which is mostly related to the expansion that uh Lombards is thinking to do which is basically to expand into an e into the EU Market through an EU subsidiary which are the the question is asking you to counter in brexit and what are some of the possible side effects or negative impacts that brexit could have on Lombard's expansion and here you need to remember what are the what is the line of business that Lombards is is involved in and then also remember how this line of business could be affected by brexit in general and if you remember Lombards is all about manufacturing food food products and so food products will be exported between different European countries and given the access or the one the single Market the single Market in the EU there was a freedom of movement of products between the different member states and as the UK was part of of these was one of these member states products were able to move freely and so if we try to analyze now the different answers or possible answers that we have the very first one basically states that brexit is going to have a better access to International markets now this is not necessarily wrong but also not accurate or not correct because if the main focus of Lombards was to go into the UK was to set up a EU subsidiary in the UK just to be able to exploit the single market and to have better access to different markets in the EU then this is likely not the correct answer for it now cheaper shipping costs is again something that is misleading because as part of getting outside of the EU the UK is likely going to encounter some difficulties in terms of shipping into the EU there will be some extra tariffs that that that in that companies would have to pay to import or to export product from and to the UK similarly if we look at number c states that it will there will be an easier import easier import transactions between the UK and the EU which is again misleading as this was the case pre- brexit however post brexit this would be very much different as the UK will be now treated as a third country now finally if we go to answer the possible answer number D which states that there will be extra export checks to the EU this is the correct answer here because again as part of leaving the EU the UK becomes a sovereign state which means that does not benefit from the single Market which means any products or Ser any products that are being shipped from the UK to the EU will have to go through proper export checks again here you'll need to recall your knowledge and you need to recall the material that you studied at unit number eight now Moving On Again into uh the next question um here what you have the question basically states that one of the investors are advising uh one of the investors you're advising is Keen to invest in Lombard EU stocks but this particular investor is concerned about some of the challenges associated with brexit what kind of advice would you give them in terms of uh investing in the stocks this is trying to test your knowledge not only about brexit and its implications but also about the company's standing and the the demand on the company's products and services and so among the the possible answers that we have here number c is the most accurate answer because again if we are to think about the return on investment that the compan is like that the investor is likely to have on their investment if they invest in the UK in the EU subsidiary that Lombards is trying to set up in the UK what we're trying to what we will need to think about here is basically a long-term type of investment rather than a short-term investment and as a long-term type of investment this is a very beneficial type of investment to help you diversify your portfolio and so it is going to be something that would help that would generate something for you at the end so on the long term it is going to be beneficial however there is no shortterm benefits it's going to be very volatile and so this is the correct answer which is basically answer number c now moving on to the next question when we're talking about the issuance of bonds again and LOM bars is trying to issue bonds here we're trying to think about the role that banks are play the role that Banks play in the process of issuing bonds now if we try to analyze the different answers we're going to see that there's only one answer that is very much the correct one there are no misleading answers here all of them you can see that how they do not fit the criteria and how they do not fit the material that we've that we've looked into together so let's start with number B C D and then we go to the correct answer which is a so question possible answer number B states that banks will fill in the legal uh documents on behalf of the uh of the company on behalf of Lomb bars again this is not accurate because this is not the role of banks rather this is the role of legal advisers now if we move on to the next possible answer which is basically number c and it states that banks are going to help lombar set the maturity date of the bonds the maturity dates for bonds again this is not the role of banks rather this is uh basically the the decided based on the financing needs of the company of Lombards on its own now the last one possible the last possible answer which is number D the inaccurate answer basically it states that banks will help lombar banks will help Lombards basically sell mix that great thank you okay so the last question the the last possible inaccurate answer is number D and basically here it states that banks will not only help in selling the bond but they will determine the price of the bond and again the price of the bond is not determined just by the Banks it's rather determined by the market and by the demand on uh the bond and if we go again to number a which is the correct answer we can see that bank's role is very much in the bank's role is very much limited to sorry okay okay and now as we can see the correct answer here is answer number a which is basically that banks will work with Lombards on organizing the road shows for these bonds now moving on to the next question we're again talking about discussing here the bonds issued by by Lombards and trying to understand whether these bonds that are classified as speculative grade bonds what do they mean for investors here you'll need to recall your understanding of the different categories of bonds as we studied together in unit number three and you also need to understand what does a speculative speculative grade bond mean and generally when we're talking about uh speculative bonds here we're talking about bonds that have a um low credit rating and at the same time they have a high they have a low credit rating because they have a high risk on defaulting and so with that in mind when you recall what speculative great bonds are you can try to analyze them the different possible answers that we have and based on what we have here as you can see a b and d are not the correct answers because they're not very much accurate they do not accurately describe what speculative great bonds are rather the answer number c is the accurate description of speculative grade bonds and as we can see it states that it is subjected that speculative grade bonds what it means for investors is that they will likely be subjected to additional risks if there are economic meltdowns so because of their nature their high risk nature add to the equation the fact that that there might be an economic hardship this could cause an extra layer of of risk for these investors now if we're looking at the next question which is basically why would it would you recommend in issuing Bulldog bonds for for Lombards this is very much related to the different types of bonds where as you remember we have International bonds you have foreign you have international bonds foreign bonds you'll need to recall all the data that we studied together in unit number three and so you'll need to understand also what Bulldog bonds are and if you remember Bulldog bonds are basically bonds that are issued in the UK by a non UK organiz by a non UK organization and the bonds here are dominated in the British in the pound turling and of course these are directed to British investors and because of this answer number B is going to be the most accurate answer rather than the the other possible answers that we have here together now if we move on to the next question which is asking you why you might suggest to investors to trade in in derivatives that are traded basically over the counter and how these could be risky a a risky type of an investment now this is basically trying to prompt you to remember what derivatives are and their nature as a financial instrument and how they could be a risky type of investment and normally if we're talking about derivatives you will remember that investing in derivatives would expose investors to specific to to different types of risks including basically the risk of defaulting on contract on of faulting before even the company completes its contractual obligations or meets it its contractual obligations and because of that you can see that number D or answer number D is the most accurate answer among uh the other ones now if we're thinking about making a recommendations a recommendation for Lombards and we're trying to recommend mortgage back Securities to Lombards the question here is trying to ask us why would we do such a recommendation why would we undergo why would recommend such a a a measure for for Lombards and here again what we need to do is recall what we studied in unit number four and examine what is the nature of mortgage back Securities and based on the knowledge that we have about mortgage back Securities we know that mortgage back Securities are basically a uh type of investment that is backed by a pool of loans and different types of assets and because of that nature they offer interactive rate on return and thus answer number c makes it the correct answer moving on to the next question here the question is asking us why we could why would we recommend crowd lending as one of the possible financing options to Lombards again some of these answers that we have here are not necessarily inaccurate rather there's only one possible there's only one most accurate answer to this particular scenario now the possible answer here that we have number a is that crowd lending they don't they do not expect repayments this is again misleading and this is one of the the inaccurate statements that we have and thus it needs to be disregarded the next one which is the fact that they provide provide flexibility in access to funds this is possible uh this is a possibly accurate description of crowd lending because they do offer flexibility in how you access funds and they do also offer somewhat flexibility and how you spend these funds however it's not one of its inherent natures and thus though these could be some of the exceptions but we cannot regard them as one of the rules or one of the main areas that would allow us basically to to to choose these uh two answers as an accurate answer for for our case study however the most accurate answer that we have here is basically the flexibility in choosing the favorable terms because Here In Crowd lending and due to the nature of crowd lending you are able to negotiate the types of of terms that you want to attach to to to this kind of transaction now if we are moving forward to the next to the next question we're thinking here about Emporium and thinking how Emporium as an investment company is trying to diversify their different Investments the question is trying to ask us what are some of the recommendations that we can give to imporium if they are invested in if they are interested in investing in financial markets here the question is trying to test our knowledge about financial markets and this is something that we've that we've revised in unit one together and here you are expected to look at what convertible dep dependes are what guaranteed bonds are what short-term convertible bonds are and what commercial papers are and as you will see some of these answers have their their I lost the description here sorry I'm still trying to remember what is the word that I was trying to find sometimes I lose the words and I just remember them in a language that is useless for what I'm trying to use it is a curse okay let's give it a shot I still can't remember but hopefully now it will flow sure so what I was trying to describe basically is that in the the answers so let's assume that I'm talking about uh convertible dependes what I've done in the definition of convertible dependes in uh number a I've mixed the attributes of that particular definition with the attributes of another definition so I mixed up convertible depatures with short-term conver convertible bonds so I'm trying to find the word a shorter way to describe that what I've done it's it's it's just literally escap my mind I can't find it anymore okay maybe if I say that sure so basically let's say the bendur and bonds what I've done I've mixed the attributes of the bendit so I've described the bendur as bonds and bonds as the bendit just try to you know to to confuse the students if that makes sense so this is what I've done and I'm I can't I'm I can't find the word that would describe that I've mixed things up to try to confuse you yes exactly intentionally yes misc correction is that misdirection yes yeah I think yes I think yeah yeah I think I can use trick them and misdirection yeah I think I can use both those thank you that this is this is actually thank you very much oh Lifesaver okay I can't remember remember where I stopped so I think what we're going to do maybe go through this this slide yeah exactly all right now for this question we are here working with another company this company is an investment company and they're trying to invest in a different financial markets and in financial markets and so you are positioned as an adviser in trying to um provide them with an advice as to how they can diverse their Investments and um how they could basically uh invest in financial markets so this question is asking you to basically recall all the data that you studied in uh unit number one and as you can see from the different possible answers that we have these answers have been misdirected you are basically you will be tricked into into the different an into the different possible answers and as you can see some of the attributes of convertible dependes have been mixed up with the attributes of another Financial instrument and so you will need to have a deeper understanding and deeper knowledge of these different financial instruments so that you are able to choose the right answer among these different possible answers now for our particular case and for this particular question you will see that number c which is guaranteed bonds is the most accurate description because the way that it was described is uh basically in the right way so what we've stated here is that guaranteed bonds provide a layer of security that interest and principle are to be made by a third party should the issue were default and this is very much an accurate description of guaranteed bonds now if you want to take commercial papers as a way of example you will see that commercial papers here the way that they were described as if they allow investors to hold instruments until maturity and collect interest uh income should the instrument price decline again this particular description is not the accurate description of commercial paper because it has some attributes of commercial papers and at the same time some attributes of the short-term convertible bonds and so you'll need to have to you'll need to be a little bit more Vigilant and you'll have to have a deeper understanding and deeper analysis of the material that we've studied together now to move forward here this question is looking at the debt to equity ratio of the comp and is trying to make you calculate and understand which one of these possible answers is the correct answer that would indicate basically the positioning of the company itself and so here the question is asking us if Lombard's returned earnings are around 100,000 100 million P dollars and their debt to equity ratio is 0.02 what are the company's liabilities and so how can can you calculate company's liabilities and basically what are the indicators what would this indicate what would your findings indicate now to calculate the liability of of the company you need to recall the formula for the debt to equity ratio and if you remember the formula to debt to of the debt to equity ratio is basically debt to equity equals uh total debt over total equity and so here what we have retained earnings so we don't have even the data about the uh total equity and to find Total Equity we know that total Equity basically equals returned earnings plus Common Stocks and also preferred stocks and with this data what you're expected to do is then to take the data that we have play with the formula of the debt to equity ratio and then try to find the the correct answer the correct answer for us here is basically 2 million $2 million and the $2 million what this would indicate for is basically that the company is in a strong position so once you are able to do the calculations once you're able to find this data you'll be able to analyze and make sure that you have the right answer in terms of the indications of what the dit to equity ratio would mean for the company for Lombards now the next question is about Lombards going through an IPO and the question is asking you why would you recommend for Lombards to go through an IPO and you'll have different answers and one of them is basically the correct answer now here if you want to go undergo an IPO one of the main things that would help you as a an organization or one of the main benefits that would help you as an organization is because you'll have access to a pool of funds and because you'll have more funds it will enable you to attract more talent that you will need to gr to grow your organization and so this is why answer a is the correct answer now again if we look at b c and d b is not necessarily a correct one because the role of Middle Men is almost non-existent in this kind of transaction or it's not one of the benefits of of going undergoing an IPO similarly it's not about retaining cash it's rather raising Capital to finance Investments and to finan growth and operations of an organization and raise and the number D or the possible answer number D which is basically about share dilution again this is a little bit misleading and this would share dilution would very much depend on the type of stocks and the types of shares that are issued and the type of shares that are held by existing shareholders and as we can see a benefit of having an IPO or undergoing IPO from among these different possible answers that we have is basically the fact that it would allow us to attract more talent for the organization now the next question question is asking us about the one of the countries that the company is trading in one of the countries that Lombards is trading in is experiencing some Financial hardships and these challenges led the IMF to intervene and as the as part of the imf's intervention you are asked to choose one of the possible answers here that would indicate the type of intervention that IMF will undertake now if we look at number B states that the IMF will undertake a structural Loan program this is somewhat misleading because the IMF there are specific specific types of interventions that the IMF would undergo and there isn't anything that is labeled as a structural Loan program nor there is something that is called an adjusted Loan program or an adjustment repayment program the IMF would very the imf's intervention would very much be associated with an adjustment program and so this is why the question this is why answer number a is correct because the fact that these other programs that are listed here are non-existent as part of the imfs imf's intervention now looking at the next question here is about Lombards trying to to issue bonds under rule 144 here we're trying to recall the criterias that are available under rule 144 this is a very much straightforward question you'll have to have an understanding of rule 144 from the SE from the SE and so as part of that it's U there there there is only one correct answer so there isn't room for basically misleading in in in that respect and so the correct answer for this scenario is basically this number c which states that Securities should not exceed 1% of the stock outstanding now moving on to you trying to recommend Lars to invest in stock warrants again this question would very much prompt you to recall the material that you studied in in in in units number one and number four about stock warrant and here what we have only one correct answer the other answers are inaccurate and Incorrect and the correct one here for us is number B Because based on our understanding for stock warrants would help us buy the underlying stock at a fixed exercise price until their expiration date and this is one of the benefits that we'll have from stock warrants now the next question is all about why you could why you might recommend loan bars to issue stock warrants as one of its financing options again here you have only one correct answer so the other ones are misleading and they're not accurate the right answer that we have here is basically answer number B which states that it allows LOM bars to pay lower interest rates R and low or lower dividends basically now moving on to the next question is how would when would it be possible for lumbars to have its stocks outstanding now this is a somewhat of a tricky question because here you would need to recall the material about unit number four and unit number one those that are related to basically stock issuance and you'll need to understand what is a stock outstanding what stock outstanding is and how stocks are traded now if we look at if we try to analyze the uh possible answers that we have answer number a states that in secondary markets after authorized Shares are traded in primary markets now this is not entirely wrong but also it's not very accurate description as we will see answer number B is the correct one because yes there are some attributes to question number a though vaguely related that resemble what what stock outstanding is all about but it is not the accurate description of of the stock outstanding now for us number B is the correct one because after public investors owning off after public investors have I'm mixing it up again sorry okay great thank you okay I think I'm fine as we can see question number the possible answer number B is the accurate one and here what is what it specifies is that investors who hold or own these authorized shares they trade with them in the secondary markets and there's only and this is why the answer number B is the most accurate answer among the different ones C and D are are entirely inaccurate and so they need to be disregarded rather than be looked into from a possibility of choosing them now moving on to the next question is about you working with Lombards and trying to explain the nature of preferred dividends and how here the question is how do you think cumulative preferred shares would come to Lombard's um Advantage now this question there's only one answer here there is no misleading answers and so the correct answer is number D which basically states that if Lomar does not create enough profit to pay preferred dividend these dividends must be paid for any common stock dividends so again this is a very straightforward question there is no room for misleading there are there are no room for inaccurate for possible answers if it that's good it came to my Aid now okay great and as we can see that there is no room for for other possible answers because all the other answers are basically inaccurate and Incorrect and number B is the correct answer for this particular scenario now moving on to the next question the next question asks basically which of the following instruments would you recommend to your client who is looking to invest in Lan bar shares the question is asking you about the different types of shares that are out there and it tests your knowledge as to what these Shares are and the nature of these different shares and as you will see the different possible answers here some of them are misleading some of them have been mixed up and so the question is trying to test your deep understanding of the different categories of shares and for us the correct answer here is number B preferred shares at number D preferred shares because preferred shares according to the definition that we have which is an accurate definition is that preferred shares offer Equity ownership and they benefit from dividends now if you look at common shares the the way they've been described the way that it was described in this particular possible answer number a is that they Grant investors say in a com in the company now again this is not entirely wrong because common shares do provide investors with the right to have a say in an organization but what kind of benefit would I have as an investor if I'm only having a say in an organization now for a company like lumbars that is trying to increase its own portfolio and diversify its portfolio an organization that is trying to gain maximum exposure and get as well at the same time more return on their investment what they would be looking into is perhaps dividends rather than having a say on organization they may not necessarily be interested in having control over the organization rather they would be interested mostly in what can they get what kind of benefits or financial benefits that they could get out of uh their investments in in the organization and thus your role as an adviser for this organization is to explain why would they benefit from using something or from investing in one particular Financial instrument over the other and again as we said it's not necessarily that the answer is wrong or one of the answers is going to be wrong but there would only be one more accurate way or an accurate answer to to choose now if you look at nominated chairs and the way that nominated chairs are described here is the fact that they offer an extra layer of protection in case of default now this is a misleading answer because this is not an attribute of of nominated shares nominated Shares are basically shares that have their the name of the investor registered to them so these Shares are very much attached to the investor themselves and so the extra layer of protection in case of default is not necessarily related to nominated shares similarly if we look at class B shares and the way that they've been described here is that because they allow preferred access to company's capital and again these you have to recall the different classes of shares and you have to recall the material that we studed together in that we've been through together in in in unit one to enable you to reach the correct conclusions now if we move to the next uh question is basically why might you recommend that Emporium invests in guaranteed bonds now again this is trying to test your knowledge about guaranteed bonds what guaranteed bonds are and how they work and and basically if we are looking at guaranteed bonds based on the descriptions that we have question number B is the most accurate question possible answer number B is the most is the most accurate answer that we have and so what it states or the way that it describes guaranteed bonds or the the benefit that we will get from guaranteed bonds is the fact that Emporium it would provide Emporium with a type of security from receiving interest and principal payments in case the issue were def Falls now if you move on to the last question which is basically why would a diluted earning per share be a worst case scenario for the financial standing of Lone bars here the what you are trying what the question is trying to ask you is trying to prompt you to is prompting you to recall what you know about earnings per share and about D share dilution and how share dilution works and as we know uh when we think about Shar dilution and how it could be basically the worst case scenario for you as an organization because share dilution basically what it would do it would mean that you could receive stocks that you that I'm mixing it up sorry for that all right just give me a second let me try to and we go for it okay and so as we can see number c is the most accurate answer for this particular scenario and the reason being is because the way that it was described that basically investors here could receive stocks that they did not purchase for face value and if they are if they haven't purchased these stocks for face value that means it is the worst case scenario for the company itself because it did not receive any profits on those or it did not receive the face value that was expected on those particular shares that were issued and so this is the kind of thinking and this is the kind of analysis that we could deploy when we look at case studies and when we're trying to analyze different possible answers that we have this is how we can reach the correct answers and how we can basically ensure that we are on the right track when analyzing the different attributes of our case and the uh questions that we have for these cases um I hope this prepared you very well and um I look forward to seeing you in the next session thank you