i) Two Basic Types of Leases and Advantages of Leasing (2 marks):

1. Operating Lease:
   An operating lease is a contractual arrangement where the lessee agrees to make periodic payments to the lessor, often for five years or less, to obtain the services of an asset. The lessee typically has the option to cancel the lease by paying a cancellation fee.
2. Financial (Capital) Lease:
   A financial lease is a longer-term, non-cancellable lease that obligates the lessee to make payments over a predefined period. The lessee typically has no option to cancel without facing a penalty.

Advantages of Leasing:

• Avoidance of Obsolescence: Leasing allows firms to avoid the risk of owning assets that might become obsolete.
• 100% Financing: Leasing provides full financing of the asset without requiring a large upfront payment.
• Tax Benefits: Lease payments may be deductible as operating expenses for tax purposes.
• Improved Cash Flow: Leasing helps preserve cash and improves liquidity since payments are spread over time.

(1 mark for types, 1 mark for advantages)

ii) Relationship Between Working Capital and Profitability (2 marks):

• Impact of Working Capital on Profitability: Effective working capital management enhances a firm’s ability to meet its short-term obligations and can directly influence profitability. Adequate levels of working capital ensure smooth operations, allowing firms to take advantage of business opportunities, thus improving profitability.
• Excessive Working Capital: Excessive working capital can lead to lower profitability due to idle assets, while insufficient working capital can hamper growth and create liquidity problems, reducing profitability.

(Any 2 points for 2 marks)

iii) Overtrading (3 marks):

Symptoms of Overtrading:

1. Increased Gearing: A firm might finance growing sales with short-term credit, increasing its debt and financial risk.
2. Declining Liquidity Ratios: Overtrading often results in lower current and quick ratios as current liabilities outgrow current assets.
3. Negative Working Capital: The firm may have insufficient working capital to finance its operations, leading to cash flow problems.

Solutions to Overtrading:

• Improved Working Capital Management: Stricter control of receivables, inventory, and payables can help balance working capital levels.
• Restricting Growth: Limiting sales growth to match available working capital resources will reduce the pressure on liquidity.

(1 mark for symptoms, 1 mark for solutions)

iv) Features and Attractions of Convertible Bonds (3 marks):

Features of Convertible Bonds:

• Convertible bonds are fixed-income securities that can be converted into ordinary shares of the company at predetermined dates and rates.
• The bondholder has the option to convert the bond into shares or continue receiving interest until maturity.

Attractions to Investors:

• Potential Capital Gains: Investors have the opportunity to convert the bond into equity and benefit from share price appreciation.
• Interest Income: Convertible bonds provide regular interest payments, offering fixed income before conversion.

Attractions to Issuers:

• Lower Interest Rates: Issuers can benefit from lower interest rates compared to non-convertible debt.
• Delayed Equity Dilution: Issuers can delay the dilution of control until conversion occurs.