Attached below

FINANCE ASSIGNMENT
TABLE OF CONTENTS
    Sl.no.
    Contents
    Page Number
    
1
    
Question 1
    3-4
    
2
    
Question 2
    4-5
    
3
    
Question 3
    6
    
4
    
Question 4
    6-7
    
5
    
Question 5
    7
    
6
    
Question 6
    8-9
    
7
    
Question 7
    9-10
    
8
    
References
    11
QUESTION 1
a) Capital structure refers to the mix of the debt and capital that is used to finance a company. Optimal Capital Structure is the one where the mix of debt and equity is done in such a way that it minimizes the weighted average cost of capital and maximizes the market value of the company. The cost of debts is relatively cheaper as compared to the cost of equity for many reasons:
· Tax reliefs are provided on interest payment in case of raising capital through debt while the dividend on equity is paid out from profits after tax.
· Return on debt is less as compared to equity.
But there is a maximum limit that the company can raise through the debts as it increases the interest payment obligations of the company. This results in a decrease in the earnings of the shareholders. An optimum debt-equity ratio of 2:1 is considered good for any company. Hence after considering all the factors a decision regarding the Optimal Capital Structure for the company is to be taken for financing its operations (Barth, M.E., Konchitchki, Y. and Landsman, W.R.).
The below-shown graph depicts an optimum capital structure.
b) ‘Diversification’ refers to different. In terms of finance, Diversification is a strategy of risk management whereby a variety of different investments are included in the portfolio. It helps to maintain a balance between the positive performing investments and negative performing investment (due to market conditions) in the portfolio. Diversification in the portfolio is necessary to earn a higher long term returns and lower the risk associated with investing in a single security or investment (Lee, B.S. and Li, M.Y.L.).
The various investments that can be included in the portfolio to indicate a diversified structure are shares, bonds, debentures, short term investments, foreign investments, commodities, etc. Risk in one can be compensated by the reward in another thus helping to earn higher yields. The only disadvantage of diversification is an increase in cost and difficulty in managing.
c) Options refer to the financial instruments which provide the buyer an opportunity or right but not the obligation to buy or sell the assets at a pre-determined price at the date which depends on the type of contract.
Now, there is a discussion on the major differences between the two options – i.e. the American Options and the European Options. The table below shows the major differences between the two.
    
EUROPEAN OPTIONS
    
AMERICAN OPTIONS
    · These options give the right to the option holders to exercise their option at a date and price which is fixed before (pre-determined).
    · These options give the option holder the right to exercise the option even before the date of expiration at a price which is determined before.
    · These options are not popular and hence are traded less in the markets.
    · These options are popular as there is an option to exercise the right even before the date of expiration and hence are traded more.
    · Usually over the counter trading is done for the European Options.
    · Over an Exchange, trading is done for the American Options.
    · The rate of premium under this option is comparatively lower.
    · The rate of premium under this option...