a. In what way is Khatri a surplus unit?

In meek words, surplus units refer to those companies who earn extra than they spend on

basic needs, and thus have money left over to invest in the economy through the form of

purchasing goods, investing, or lending. Khatri Company can be termed as a surplus unit

because it has conceived in treasury securities where it can provide funds as investments

to the Treasury.

b. In what way is Khatri a deficit unit?

A deficit spending unit defines how an economy, or an economic group within that

economy, has spent more than it has earned over a specified measurement period. When

an entity spends, more than they take in, they may even come to a situation to sell debt to

raise funds. Khatri Company currently is a deficit unit as it has previously borrowed fund

from banks and other financial institutions.

c. How might finance companies facilitate Khatri’s expansion?

Maximum finance companies obtain funds by issuing securities and then lend the funds

to individuals and small businesses. Some finance companies lend to consumers, while

others make loans to businesses or finance the sales of manufacturers' products to

customers. Finance companies can assist Khatri Company through asset-based loans.

Commercial finance companies lend to businesses based on pledged assets who have

assets like accounts receivable, inventory and equipment to pledge as collateral but are

low on cash. Khatri Company, as per the case, has 50 million worth of assets. At that

juncture, they can involve in more mergers and acquisitions.

d. How might commercial banks facilitate Khatri’s expansion?

In collective, commercial banks are the leading depository institution. They serve surplus

units by offering an extensive variety of deposit accounts, and they transfer deposited

funds to deficit units by providing direct loans or purchasing debt securities. Commercial

banks serve both the private and public sectors; households, businesses, and government

agencies utilize their deposit and lending services.

Businesses need money to operate and grow. They also sometimes require additional

funds for big purchases, and their assets might be tie up in inventory or expensive

equipment. Loans will help Khatri Company purchase supplies, real estate, and vehicles

necessary for operations on the business owns assets that can be pledge as collateral.

e. Why might Khatri have limited access to additional debt financing during its

growth phase?

Debt financing occurs when a firm raises money for working capital or capital

expenditures by selling debt instruments to individuals and/or institutional investors. In

return for lending the money, the individuals or institutions become creditors and receive

a promise that the principal and interest on the debt will be repaid.

Khatri Company relies heavily on commercial banks for loans. When the company is first

establish with equity funding from its owners, Khatri Company could easily obtain debt

financing because of the backup by the firm’s assets. While expanding, Khatri Company

continually relied on extra debt financing, which led to increase in the debt of the

company. This resulted into less and less number of banks willing provide debt financing.
 This might have happened because banks might have considered the risk that Khatri

might not be able to repay additional loans.

f. How might securities firms facilitate Khatri’s expansion?

Securities firms underwrite bonds that are issue by finance companies. Some securities

firms act as brokers, executing securities transactions between two parties. Some

securities firms might place newly issued securities for Khatri Company, and may sell the

securities for a client at the best price they can get. Securities firms can also offer

advisory services on mergers and other forms of corporate restructuring, which might

help Khatri Company.

g. How might Khatri use the primary market to facilitate its expansion?

Primary markets facilitate the issuance of new securities. Primary market transactions

provide funds to the initial issuer of securities. Khatri Company can sell new issues of

common and preferred stock, corporate bonds and government bonds, notes and bills on

the primary market to fund business improvements or expand operations. Most of the

funding goes to the issuer, and investors typically pay less for securities on the primary

market.

h. How might it use the secondary market?

The secondary market is where investors buy and sell securities they already own.

Secondary markets include option markets and deal markets in which ownership of

securities is transferred. Secondary markets provide investors with protection by

organizing and regulating the markets to operate as fair and open marketplaces with

safeguards against frauds, fraud and risk. Trading of stock on the secondary market frees

investors to sell when the need arises while allowing companies to continue using the
 money to finance growth over longer periods. Thus, Khatri Company can sell its holdings

of Treasury securities in the secondary market.

i. If financial markets were perfect, how might this have allowed Khatri to avoid

financial institutions?

If financial markets were perfect, securities buyers and sellers would have full access to

information. Individuals with available funds would be capable of identifying credit

worthy borrowers to whom they could lend those funds, and have the expertise to assess

the creditworthiness of potential borrowers. Financial institutions are needed to resolve

the limitations caused by market imperfections, thus they accept funds from surplus units

and channel the funds to deficit units. With a perfect financial market, the information

and transaction costs of financial market transactions would be sufficiently enough.

Thus, if the market were perfect, Khatri Company would be able to avoid financial

institutions to help them.

j. The loans that Khatri has obtained from commercial banks stipulate that Khatri

must receive the bank’s approval before pursuing any large projects. What is the

purpose of this condition? Does this condition benefit the owners of the company?

The purpose of this condition is to prevent Khatri Company from using the loan amount

in a risky manner, as Khatri Company would not be able to pay its loans if takes risks

expanding its business. Companies would prefer to take more risks than the lenders

would allow them to. This is quite opposite to what lenders want, because they hope to

receive their repayments on loans that they have provided to the company. They also

hope that their loan amount would be use in a productive manner that would yield good

profit, and definitely generate enough profit to repay the loans.