THE SAINT AUGUSTINE UNIVERSITY OF TANZANIA

TYPE OF ASSIGNMENT INDIVIDUAL ASSIGNMENT

NAME JOHN, ISACK .J
REG. NUMBE PGDAF 77862
COURSE PGDAF
SUBJECT CORPORATE FINANCE
SUBJECT CODE FI 500
LECTURE NAME MRAWA DANIEL
DATEOF SUBMISSION 17 DEC 2019

Questions

1 explain the followings terms

(a)hire purchase, leasing, types of leasing,

(b)Debt factoring

(c)Export finance

2 (a)Explain the meaning of loan and its types including bilateral and multilateral loans

(b)Characteristics of loans
QUSETION ONE

Hire purchase

Hire purchase is an agreement in which the owner of the assets lets them on hire for regular
Instalments paid by the hirer. The hirer has the option to purchase and own the asset once all the
agreed payments have been made. These periodic payments also include an interest component paid
towards the use of the asset apart from the price of the asset.
Hire purchase is a typical transaction in which the assets are allowed to be hired and the hirer is
provided an option to later purchase the same assets.
Following are the features of a regular hire purchase transaction:
▪ Rental payments are paid in instalments over the period of the agreement.
▪ Each rental payment is considered as a charge for hiring the asset. This means that, if the
hirer defaults on any payment, the seller has all the rights to take back the assets.
▪ All the required terms and conditions between both the parties involved are documented in a
contract called Hire-Purchase agreement.
▪ The frequency of the instalments may be annual, half-yearly, quarterly, monthly, etc.
according to the terms of the agreement.
▪ Assets are instantly delivered to the hirer as soon as the agreement is signed.
▪ If the hirer uses the option to purchase, the assets are passed to him after the last instalment
is paid.
▪ If the hirer does not want to own the asset, he can return the assets any time and is not
required to pay any instalment that falls due after the return.
▪ However, once the hirer returns the assets, he cannot claim back any payments already paid
as they are the charges towards the hire and use of the assets.
▪ The hirer cannot pledge, sell or mortgage the assets as he is not the owner of the assets till
the last payment is made.
▪ The hirer, usually, pays a certain amount as an initial deposit / down payment while signing
the agreement.
▪ Generally, the hirer can terminate the hire purchase agreement any time before the
ownership rights pass to him.

Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset.
Property, buildings and vehicles are common assets that are leased. Industrial or business equipment
is also leased. Broadly put, a lease agreement is a contract between two parties, the lessor and the
lessee.
There are two types of lease which are finance lease and operating lease`

A. finance lease
A finance lease is a way of providing finance – effectively a leasing company (the lessor or owner)
buys the asset for the user (usually called the hirer or lessee) and rents it to them for an agreed
period. A finance lease is defined in Statement of Standard Accounting Practice as a lease that
transfers “substantially all of the risks and rewards of ownership of the asset to the lessee”.
Basically this means that the lessee is in a broadly similar position as if they had bought the asset.
The lessor charges a rent as their reward for hiring the asset to the lessee. The lessor retains
ownership of the asset but the lessee gets exclusive use of the asset (providing it observes the terms
of the lease).
The lessee will make rental payments that cover the original cost of the asset, during the initial, or
primary, period of the lease. There is an obligation to pay all of these rentals, sometimes including
a balloon payment at the end of the contract. Once these have all been paid, the lessor will have
recovered its investment in the asset. The customer is committed to paying these rentals over this
period and, technically, a finance lease is defined as non-cancellable although it may be possible to
terminate early.
What happens at the end of the primary finance lease period will vary and depends on the actual
agreement but the following are possible options:
– the lessee sells the asset to a third party, acting on behalf of the lessor
– the asset is returned to the lessor to be sold
– the customer enters into a secondary lease period
When the asset is sold, the customer may be given a rebate of rentals which equates to the majority
of the sale proceeds (less the costs of disposal) as agreed in the lease contract.
If the asset is retained, the lease enters the secondary period. This may continue indefinitely and
will come to an end when the lessor and lessee agree, or when the asset is sold. The secondary
rental may be much lower than the primary rental (a ‘peppercorn’ rental) or the lease may continue
on a month by month basis at the same rental.

B. Operating lease
In contrast to a finance lease, an operating lease does not transfer substantially all of the risks and
rewards of ownership to the lessee. It will generally run for less than the full economic life of the
asset and the lessor would expect the asset to have a resale value at the end of the lease period –
known as the residual value.
An operating lease is more typically found where the assets do have a residual value such as
aircraft, vehicles and construction plant and machinery. The customer gets the use of the asset over
the agreed contract period in return for rental payments. These payments do not cover the full cost
of the asset as is the case in a finance lease.
Operating leases sometimes include other services built into the agreement, e.g. a vehicle
maintenance agreement. Ownership of the asset remains with the lessor and the asset will either be
returned at the end of the lease, when the leasing company will either re-hire in another contract or
sell it to release the residual value. Or the lessee can continue to rent the asset at a fair market rent
which would be agreed at the time.
Accounting regulations are under review, however at the current time, operating leases are an off
balance sheet arrangement and finance leases are on balance sheet. For those accounting under
International Accounting Standards, IFRS16 will now bring operating lease on balance sheet
A common form of operating lease in the vehicle sector is contract hire. This is the most popular
method of funding company vehicles and has been growing steadily.

Debt factor
Debt factoring is the process of selling your unpaid customer invoices, known as accounts
receivable, to a debt factoring provider or "factor." The factor now owns the debt and chases
payment from the customer. Typically, you receive around 80 percent of the invoice value almost as
soon as you submit the invoices for factoring. Once the customer pays up, the debt factoring
company will give you the remaining 20 percent of the invoice less their provider's fee.
Debt Factoring as a Source of Finance
Most commercial invoices are based on net-30, 60 or even 90-day terms, which means it will be
several weeks before you're paid for the work you have completed. Even then, not all customers
will pay their bills on time and some will not pay at all. Debt factoring assures payment of the
invoice much sooner, which reduces the cash cycle for the business. This is good news if you
urgently need to pay bills, buy supplies or repair an important piece of equipment.

Different Types of Debt Factoring

There are two types of debt factoring known as recourse and non-recourse.
• Recourse
With recourse factoring, you remain liable for payment of the invoice. If the customer does not pay
after a specified period, you must pay back the advance and the factoring company's fee.
• non-recourse
With non-recourse factoring, the risk of non-payment passes to the factor. If the customer does not
pay, you keep the cash advance and the factor takes the loss. Unsurprisingly, you can expect to pay
a higher fee for non-recourse factoring. It also takes longer to arrange as the factor will scrutinize
your customers' credit ratings to make sure that the invoices you're factoring stand a good chance of
being paid on time.

Export finance
Export finance refers to financial assistance extended by banks and other financial institutions. to
businesses for the shipping of products outside a country or region
Export finance offers a way for businesses to release working capital, specifically from overseas
transactions, that might otherwise remain tied up in invoices for long periods of time.
This type of trade finance is very specific, tailored to suit the financial demands of companies who
export trades. It allows business to grow overseas. It also increases your trade with large foreign
multinationals.
Credit and finance are the life-blood of business whether domestic or international. The financial
requirements of exporters can be of two types:
(a) Pre-shipment Finance: Pre-shipment finance refers to the credit extended to exporters prior to
the shipment of goods for the execution of an export order.
(b) Post-shipment Finance: Post-shipment finance refers to the credit extended to exporters after
the shipment of goods for working capital requirement.

QUESTION TWO
loan is the lending of money by one or more individuals, organizations, or other entities to
other individuals, organizations etc. The recipient (i.e. the borrower) incurs a debt, and is
usually liable to pay interest on that debt until it is repaid, and also to repay the principal
amount borrowed.

Types of loans

Multilateral
Multilateral debt is the debt owed by developing countries to the World Bank and
International Monetary Fund (IMF), known as the Bretton Woods Institutions (BWIs). In the
last decade these institutions have become the major creditors of the developing world.

Bilateral Loan

Bilateral Loan is a form of loan business in which one bank provides loans for one borrower for
working capital, CAPEX or General Corporate Purpose.
Feature
The major advantage of bilateral loan is that bank offers relatively independent, flexible and
customised scheme for borrower.
Syndicated Loan
Introduction
Syndicated loan is a form of loan business in which two or more lenders jointly provide loans for
one or more borrowers on the same loan terms and with different duties and sign the same loan
agreement. Usually, one bank is appointed as the agency bank to manage the loan business on
behalf of the syndicate members.
Features
1. Large amount and long term. It can meet borrowers' demand for funds of long term and large
amount. It is generally used for new projects loans, large equipment leasing and enterprises'
M&A financing in transportation, petrochemical, telecommunication, power and other
industries.
2. 2. Less time and effort for financing. It is usually the responsibility of the arranger for doing the
preparation work of establishing the syndicate after the borrower and the arranger has agreed on
loan terms by negotiation. During implementation of the loans, the borrower does not need to
face all members of the syndicate, and relevant withdrawal, repayment of principal with interest
and other management work related to the loans shall be fulfilled by the agency bank.
3. Diversified approaches to syndicated loans. The same loan syndications can include many
forms of loans, such as fixed-term loans, revolving loans, standby L/C line on requirements of
the borrower. Meanwhile, the borrower can also choose RMB, USD, EUR, GBP and other
currency or currency portfolio, if needed.
4. It can help borrowers establish a good market image. Successful establishment of the syndicate
comes from the participants' full recognition of the borrower's financial and operational
performance, by which the borrower can build up their reputation.
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ed) prentice hall

2. Brigham ,F.E Houston,F.J (2008) Fundamental of financial management(12 ed)


3. Ross, S.A.,Westerfield, R.W.,Jordan, B.D (2001) Essential of corporate finance (3 ed)

4. Denzel, W.,Antony, H(2001)Corporate finance principles &practice(2 ed) financial times