Reference no: EM133067007

Question - Buddha Air Private Ltd is a largest privately operated air travel company in Nepal. It was founded 17 years ago by Basnet family. The airline operations commenced on 1997 with a sightseeing flight to Mount Everest using a brand-new Beech craft 1900D. Initially, this company was financed with equity capital and the authorized capital of the airline company was Rs70 million. Buddha Air prides itself in maintaining an absolutely clean and transparent financial accounting which is one of the reasons why the company has gained the trust of lending financial institutions like Nepalese banks, finance companies, and foreign lenders. In 2016, the airline is planning to borrow substantial loan, so as to extend its operations through additional aircrafts such as ATR 42. The ATR 42 costs Rs 500 million and it plans to borrow from Everest Bank with 10 percent down payment. This is a 30-year loans which requires the airline company to repay in monthly basis. The interest rate is fixed at 10 percent. Moreover, the airline company has a credit line with a bank in case it suddenly needs to obtain funds for a temporary period. In order to maintain daily liquidity needs of the airline, it has purchased government securities that it could sell if it experiences any liquidity problems. Buddha Airline is so successful in creating its assets value and sales revenue every year. The airline has an expectation of a strong economy in the country so it plans to grow in the future by expanding its business and through acquisitions. It expects that it will need substantial long-term financing and plans to borrow additional funds either through loans or by issuing bonds. The company is also considering the issuance of stock to raise funds in the next year. The airline company closely monitors conditions in financial markets that could affect its cash inflows and cash outflows and therefore affect its value. Buddha Air is searching for young and energetic personnel in many fields to make new plan successful. You are a graduate of Tribhuvan University with 5 years of experience as a financial planner in other airline sectors and applying for post of financial planning officer in this airline company. The head of the Human Resource Department has been provided you the information as described above and ask to answer the questions given below:

a. Mention, in what way is Basnet family a surplus unit and deficit unit? Mention the two sources the airline is planning to satisfy immediate needs of funds.

b. What are the ways in which capital is transferred between savers and borrowers? If Buddha Air decided to issue additional common stock, and Ram Panday purchased 100 shares of this stock from Siddhartha Capital Limited, would this transaction be a primary or a secondary market transaction? Describe the role of middlemen used in this transaction. Would it make a difference if Ram purchased previously outstanding Buddha Air stock in the dealer market? Explain.

c. What does it mean for a market to be efficient? Explain why some stock prices may be more efficient than others. Why are financial markets essential for a healthy economy and economic growth?

d. Ram Panday has read a number of newspaper articles about a huge IPO being carried out by Airline companies like Buddha Air. He wants to get as many shares in the IPO as possible, and would even be willing to buy the shares in the open market right after the issue. What advice do you have for him?

e. If financial markets were perfect, how might this have allowed Buddha Air to avoid financial institutions?