1. Banks have two important economic functions.

First, they operate a payments system, and

a modern economy cannot function well without an efficient payments system. We make most
of our payments by writing checks, swiping credit cards issued by banks or tied to them, and
by paying bills via online banking. Most of the money stock of the country is in fact bank
money; the rest of the currency is “legal tender” issued by the government, namely Federal
Reserve Notes and coins. We have confidence in bank money because we can exchange it at
the bank or an ATM for legal tender. Banks are obligated to hold reserves of legal tender to
make these exchanges when we request them.

The second key function of banks is financial intermediation, lending or investing the money
we deposit with them or credit they themselves create to business enterprises, households,
and governments. This is the business side of banking. Most banks are profit-seeking
corporations with stockholders who provide the equity capital needed to start and maintain a
banking business. Banks make their profits and cover their expenses by charging borrowers
more for loans than they pay depositors for keeping money in the bank. The intermediation
function of banks is extremely important because it helped to finance the many generations of
entrepreneurs who built the American economy as well as the ordinary businesses that keep it
going from year to year. But it is inherently a risky business. Will the borrower pay back the
loan with interest? What if the borrower doesn’t repay the loan? What happens to the banking
system and the economy if a large number of borrowers can’t or won’t repay their loans? And
what happens if, in the pursuit of profit, banks do not maintain levels of reserves and capital
consistent with their own stability?

2. Ability to Raise Capital - Publicly held companies are able to raise capital by creating and selling
shares. Unlike loans, money from shares does not need to be repaid. Shares can also be used as
compensation for employees, increasing employee morale.

the financial benefit in the form of raising capital is the most distinct advantage.
Capital can be used to fund research and development (R&D), fund capital
expenditure, or even used to pay off existing debt.
Another advantage is an increased public awareness of the company because
IPOs often generate publicity by making their products known to a new group of
potential customers. Subsequently, this may lead to an increase in market share
for the company. An IPO also may be used by founding individuals as an exit
strategy. Many venture capitalists have used IPOs to cash in on successful
companies that they helped start-up.
Even with the benefits of an IPO, public companies often face several
disadvantages that may make them think twice about going public. One of the
most important changes is the need for added disclosure for investors. In
addition, public companies are regulated by the Securities Exchange Act of 1934
in regard to periodic financial reporting, which may be difficult for newer public
companies. They must also meet other rules and regulations that are monitored
by the Securities and Exchange Commission (SEC).

More importantly, especially for smaller companies, is that the cost of complying
with regulatory requirements can be very high. These costs have only increased
with the advent of the Sarbanes-Oxley Act. Some of the additional costs include
the generation of financial reporting documents, audit fees, investor relation
departments, and accounting oversight committees.

10.

11. The direct costs of bankruptcy are costs that result in the filing of bankruptcy for a

business. The business would need to liquidate assets, and they would incur costs such as
legal costs, accounting costs, and loss of tax benefits. The indirect costs are costs that are
associated with distress.

The generally more significant with the two is direct costs of bankruptcy.

12. Covenants are undertakings in a loan agreement which either limit the actions a

borrower can take or require the borrower to take specific steps during the course of
the loan term. Covenants serve as a means of protecting the interests of the lender.

Managers should consider the goals that the business should meet when
negotiating covenants. While setting these goals, managers should also
provide the flexibility the business would need to run prudently [Art11].
“Before entering into negotiations, clarity is required about any types
ofcovenants that could potentially hobble or harm the business” [Art11]. This
take a lot of time because they have to go through all financial scenarios.

13. Project financing is a loan structure that relies primarily on the project's cash flow for
repayment, with the project's assets, rights, and interests held as secondary collateral. Project
finance is especially attractive to the private sector because companies can fund
major projects off-balance sheet. In many cases it will not be convenient (or may not be possible) for
the project assets to be held directly (whether by an operator or the individual sponsors) and in these
cases it may be appropriate to establish a company or other vehicle which will hold the project assets
and become the borrowing vehicle for the project. The sponsors will hold the shares in this company or
other vehicle in agreed proportions. In most cases where this route is followed, the company or other
vehicle would be a special purpose vehicle established exclusively for the purposes of the project and
the use of the special purpose vehicle for any purposes unconnected with the project in question will be
published. In addition to the constitutional documents establishing the vehicle, the terms on which it is
to be owned and operated will be set out in a sponsors’ or shareholders’ agreement

14. The criteria for a capital lease can be any one of the following four
alternatives:
  Ownership. The ownership of the asset is shifted from the lessor to the
lessee by the end of the lease period; or.
 Bargain purchase option. ...
 Lease term
 Present value.

15. As a result, a sinking fund helps investors have some protection in the event of the
company's bankruptcy or default. A sinking fund also helps a company allay concerns
of default risk, and as a result, attract more investors for their bond issuance. .