Part A:

The Brown Ltd produces a range of central heating systems for sale to builders' merchants. As a result of increasing demand for the business's products, the directors have decided to expand production. The cost of acquiring new plant and machinery and the increase in working capital requirements are planned to be financed by a mixture of long-term and short-term borrowing.

Required:

(a) Discuss the major factors that should be taken into account when deciding on the appropriate mix of long-term and short-term borrowing necessary to finance the expansion programme. (10 marks)

(b) Discuss the major factors that a lender should take into account when deciding whether to grant a long-term loan to the business. (10 marks)

Part B:

1. Why is the concept of the time value of money so important to financial managers? (5 marks)
2. Explain how nondiversifiable risk differs from diversifiable risk. Why is it that the market will pay an investor for taking on nondiversifiable risk but will not pay an investor for taking on diversifiable risk? Will diversifiable risk be zero if nondiversifiable risk is zero? Explain. (10 marks)