CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Mathematical Modeling in Finance
Assignment # 01
Submitted To:
Dr Mobeen Ur Rehman
Student Name:
SHABAN KHAN
Reg Number:
1921115
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
QUESTION 1
Part a:
PUBLIC LIMITED COMPANY:
A company whose securities are traded on a stock exchange and can be bought and sold by
anyone. Public companies are strictly regulated, and are required by law to publish their complete
and true financial position so that investors can determine the true worth of its stock (shares).
Also called publicly held company.
HOW TO REGISTER A COMPANY IN PAKISTAN:
The Step by Step Procedure to go for Public Limited Company,
Step 1: Approval of Company Name:
This is the first step of company registration in Pakistan is choosing the company’s name. It is
important to devise a unique company name that would set you apart from the rest in the industry.
You must follow the restrictions and guidelines. For example, make sure that your company’s
name does not include any prohibited words.
Step 2: Submission of Documents
Once the company name gets the approval, you need to submit the incorporation documents to
the Securities and Exchange Commission of Pakistan (SECP).
Step 3: Certificate of Incorporation
After submitting the documents, the SECP evaluates them. They check their validity. A digital
signature is granted by the National Institutional Facilitation Technologies (NIFT) and can be
acquired through the SECP.
Also, they issue the certificate of incorporation. Presentation of the company may be needed.
However, this depends on where the business started.
Step 4: Deposit of Shares
After the registration, shareholders must deposit their corresponding amount of shares to the
company’s bank account.
Step 5: Registration of Income, Sales, and Professional Taxes
In conclusion, the last step of company registration in Pakistan is the registration with the Federal
Board of Revenue (FBR) and issuance of a national tax number (NTN). A sales tax registration
number may be registered if applicable.
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Part b
SHARES:
Shares are units of ownership interest in a corporation or financial asset that provide for an equal
distribution in any profits, if any are declared, in the form of dividends.
NOTE: Physical paper stock certificates have been replaced with electronic recording of stock
shares, just as mutual fund shares are recorded electronically.
TYPES OF SHARES:
The two main types of shares are common shares and preferred shares.
Preferred Stock:
Preferred stock is a type of stock that typically pays fixed dividends. Preferred stock is less risky
than common stock, but more risky than bonds.
Common stock:
Common stock is a security that represents ownership in a corporation. Holders of common stock
elect the board of directors and vote on corporate policies. This form of equity ownership
typically yields higher rates of return long term.
PREFERRED STOCKS VERSUS COMMON STOCKS
This table illustrates the difference between preferred stocks, common stocks, and bonds.
NOTE: Bond features are mention for general knowledge.
FEATURE PREFERRED COMMON BOND
Ownership of Company Yes Yes No
Voting Rights No Yes No
Price of Security Is Based on: Earnings Earnings S&P Rating
Dividends Fixed Varies Fixed
Value if Held to Maturity Full Varies Full
Order Paid if Company Defaults Second Third First
WHY COMPANIES ISSUE PREFERRED STOCK:
Preferred stock is a form of equity, or a stake in the company's ownership. Instead of being a
form of debt equity, preferred stock works more like a bond than it does like a share in a
company. Companies issue preferred stock as a way to obtain equity financing without sacrificing
voting rights. This can also be a way to avoid a hostile takeover. A preference share is a crossover
between bonds and common shares.
Preferred Shareholders Are Higher in the Payout Order
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
While basically a form of stock investment, preferred stockholders are in the payout lineup right
behind the debt holders in a company's credit holder lineup. Common stockholders fall in line to
receive payment after preferred shareholders, but if the company folds, all debt holders get paid
before any stockholders, preferred or common. Demand is the driving force behind the issuance
of preferred shares. These shares are wanted by investors. Preference shares are valued by
investors as a way to reduce risk while ensuring preferred status for payment if the company files
bankruptcy.
Perpetual, Long-Term Investments
Think of preferred stock as a long-term investment. These shares have terms from 30 to 50 years
in length, or are perpetual with no maturity date no matter how long they are held. Plus, some of
the 30-year stocks can be extended for an extra 19 years if desired. Preferred shareholders receive
a return that's based on dividend yield, and this can be a floating or a fixed rate. This differs from
how common stock shareholders, who benefit whenever a company grows, are paid.
Call Provisions and Risk
One potential drawback preferred shareholders face is that a call provision is usually part of the
equation. Call provisions, along with preferred stock's long time to maturity, are considered
undesirable by some investors. Fixed income investing in stock with long-term maturities have
proven to offer the weakest risk/reward benefits, meaning investors see the lowest return for the
amount of risk they incur.
Long-Term Debt Instruments with No Callback Provisions
The United States government issues long-term debt instruments that don't have a callback
provision.
This means the issuer has the right to prepay the debt but isn't forced to do that.
With government debt and other non-callable forms of debt, there is a symmetrically-
balanced price risk.
That means when interest rates go up or down, the price of the non-callable bond goes up or
down the exact same amount, but in the opposite way.
This differs from preferred stock that's callable.
When preferred stock drops as interest rates rise, the issuer can call it and replace it with lower
rated preferred stock or even common stock if they choose.
So, preferred stock has an asymmetric risk because they carry long-term risk but the call feature
limits the number of rewards for your long-term investment.
Par Value of Preferred Stocks
Preferred stocks usually trade right around par value, and almost all preferred stock issued is
callable at par value. The benefits of preferred stock are very limited, and when the call date is
near, there's almost no upside. Preferred stocks are rarely ever rated highly and are sometimes
called junk bonds, though not all qualify as junk bonds. Long-term investors who are focused on
earning dividends at a fixed rate of return choose preferred stocks. This is a way to earn a fixed
rate of return and avoid the rising and falling values of common shares in the stock market.
Low Debt-to-Equity Ratios
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Issuing preferred shares can help a company achieve a lower debt-to-equity ratio compared to
issuing debt bonds. Companies use this technique to manage balance sheets. This makes the stock
look more appealing to potential investors who usually opt to invest in companies with lower
debt-to-equity ratios.
Companies that need more financing might also be forced to issue preferred shares rather than
trigger a callback on bonds that were issued previously via a technical default. A technical default
is triggered when a company's debt-to-equity ratio goes over a preset limit noted in the currently
issued bond covenant. It can also help companies avoid the need to increase interest rates on
previously issued bonds.
WHY COMPANIES ISSUE COMMON STOCK:
There are a number of benefits associated with the issuing additional shares of common stock.
These benefits vary for companies that are publicly held and privately held. For both privately
and publicly held companies, the following advantages apply:
Debt reduction
The funds a company receives from its sale of common stock does not have to be repaid, and
there is no interest expense associated with it. Thus, if a company currently has a high debt load,
it can issue common stock and use the proceeds to pay down its debt. By doing so, the company
reduces its fixed costs (since interest expense has been reduced or eliminated), which makes it
easier to earn a profit at lower sales levels.
Liquidity
If company management believes that the business requires cash to see it through future
down cycles in the economy, or other issues that will constrain its cash flow, issuing
common stock is one potential source of the needed cash.
For only publicly held companies, the following additional benefits apply:
Acquisitions
A public company can issue common stock to the shareholders of acquisition targets,
which they can then sell for cash. This approach is also possible for private companies,
but the recipients of those shares will have a much more difficult time selling their shares.
Credit ratings:
A public company may have paid an independent credit rating agency to assign credit
ratings to its securities. If the company has obtained a large amount of cash from stock
sales, it will appear more financially conservative, and so the agency is more likely to
assign a better credit rating.
Float:
A public company will attract more investors if it has a large pool of registered shares
available that they can buy and sell. By issuing more common stock and having those
shares registered with the Securities and Exchange Commission, the float increases.
However, if you issue shares that are not registered, then they cannot be sold, and the float
is not increased.
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Offsetting these numerous benefits is the concern that issuing an excessive quantity of shares
reduces earnings per share, which is a key benchmark that is closely observed by the investment
community. Thus, companies tend to be prudent with their stock issuances, despite the numerous
benefits noted here.
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Part c:
PAR VALUE:
Par value is the face value of a bond. It is the principal amount that the lender (investor) is
lending to the borrower (issuer).
Example:
Let’s Assume Company XYZ issues $100,000 in bonds to the public. It may do so by issuing
1000 bonds or share, each with a $1000 par value.
When each bond matures, the borrower will pay back the par value of $100 to the lender.
DISCOUNT VALUE:
A discount on stock occurs when the stock’s par value is higher than the issuing price. The
difference between the greater par value and the lesser issue price is considered the discount. This
represents the amount of the par value that investors were unwilling to pay for when the stock
was issued.
Example:
XYZ Company is seeking out new investors and trying to sell its $10 par value stock.
Unfortunately, there isn’t much interest in the company and Beth could only find one investor
who is willing to purchase 1,000 shares for $5 per share. XYZ agrees to the price and issues
1,000 new shares to the investor.
She records the new stock issuances by debiting cash for $5,000, debiting discount on common
stock for $5,000, and crediting common stock for $10,000.
PREMIUM VALUE:
A premium value is a value trading above its face value or in other words; it costs more than the
face amount on the bond. A bond or stock might trade at a premium because its interest rate is
higher than current rates in the market.
Example:
A bond that was issued at a face value of $1,000 might trade at $1,050 or a $50 premium. Even
though the bond has yet to reach maturity, it can trade in the secondary market. In other words,
investors can buy and sell a 10-year bond before the bond matures in ten years. If the bond is held
until maturity, the investor receives the face value amount or $1,000 as in our example above.
PART C REQUIREMENT SOLUTION:
According to the above mention definitions and example of Par, Discount and premium value if
the company share price is $100 but their market price is $120, it’s mean that it is premium
because according of the above mentions definition and example the share price is higher than the
face value of the company share.
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
QUESTION 2:
Part a:
Ahmad sugar mills have a strict credit policy, as a result of a strict credit policy the company is
forcing its customers to pay in cash. The purpose behind this strict policy could be that the
company must be facing the cash flow issues. This can be witnessed through the balance stated
on the bank statement “The balance show an overdraft of $2118 which means the company owns
$2118 to the bank”.
My personal opinion regarding this policy is against this policy, “it should adopt a moderate
credit policy allowing its customers to make payment after few days.This would have impact on
sales, as some customers prefer credit purchasing. The payment period should not be long as it
would result in bad debts. Company should also determine the receivable collection period for
existing customers on the basis of their past track record”.
Part b:
Receivable is the amount which is owned to the company by credit customers. Receivable arise
when a company sells goods on credit to its customers. As in the case of Ahmad sugar mills, they
are not selling goods on credit therefore they have no receivable balance in their accounts.
Part c:
There is this rule in the businesses that if a company sells its goods on credit then the business
charges a little bit more margin other than if they sells same goods on cash. If Ahmad sugar mills
adopts a moderate credit policy where goods can be sold on short credit period then Ahmad sugar
mills can earn extra margin on sales.The risk of bad debts may reduce the profit margin but it can
be tackled by giving credit to old customers. Secondly the option of credit purchase may also
attract new customers which would increase revenue and ultimately the profit will increase.
If Ahmad sugar mills will uses a short receivable collection period for new customers than that
can reduce the risk of new payments by new customers, and as a result their profit is increased.
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Part d:
Cash Book
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Unpresente
vii) $1,800
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encashed 0
Bank Reconciliation statement as on 31st May 20, 2016;
CECOS UNIVERSITY
BBA (Hons) - Bachelor of Business Administration (Hons)
Particular Rs. Rs.
i) Balance per book statement $2,118
Add:
Unpresented $1,800
$10,50
Not encashed
0
Understated $300
Misstatement $99
Credit Twice $3,000
Dividend $90 $15,789
$17,907
Less:
Dishonored $210
Interest $228
Merchandise $2,077 ($2,515)
ii)Balance as per Cash book (Credit) $15,392
