Reference no: EM133204901

Question 1

A company that you target to invest in has just announced that it has successfully obtained a seven-year bank loan for its business' future expansion. The news urges you to re-evaluate the company's financial position. With that, you would like to conduct a thorough financial analysis on the new loan of the company.

a) What kind of analysis should you conduct on the company's new debt financing?

b) Explain how the news released could affect the company's stock prices given the market is in semi-strong efficiency.

c) Explain FOUR (4) aspects of evaluation that you can perform for the financial analysis in (a).

d) After analysis, you find that the additional seven-year loan financing has taken up 90 percent of the debt-to-total capital of the company. Explain how a high ratio of total debt to total capital is relevant to the company's financial performance. 

e) Since the new loan is seven-year long, you would like to conduct a long-term earnings forecast. Discuss in detail how to perform the earnings forecast and the limitation of the forecast.

f) Given the seven-year financing has reduced the company's debt capacity, the company also reveals that off-balance-sheet financing may be adopted in the future if needed. Based on the statement made by the company, you need to find out how off-balance-sheet financing is operated, and find out THREE (3) examples of off-balance-sheet financing.

g) You also find out that part of the seven-year financing is expensed for research and development (R&D) purposes. Discuss how the cost of R&D could affect the quality of earnings forecast.