THE UNIVERSITY OF MELBOURNE
DEPARTMENT OF FINANCE
FINAL EXAMINATION PART 2—SEMESTER 2, 2020
SUBJECT NUMBER: FNCE90046
SUBJECT NAME: Treasury Management
EXAMINATION DURATION: 3 hours (total for Parts 1 and 2)
READING TIME: 15 minutes (total)
TOTAL MARKS: 70
This is an OPEN BOOK examination, so any materials may be utilised during the exam.
Instructions to Students:
- Complete your enrolment number at the top of this page.
- This is Part 2 of the final exam. Ensure that you also complete Part 1 (Quiz) of the exam.
- This Part comprises TWO sections totalling 70 marks. Section A comprises EIGHT (8) calculation questions, with allocated marks ranging from 2 to 8 marks. Total marks for Section A = 30 marks. Section B comprises THREE (3) multi-part written answer questions worth a total of 40 marks.
- All answers are to be typed in the text box below each question. The text boxes will expand as you type. Do not change the font style, colour in the answer text boxes.
- Section A calculation questions are to be typed in the text box below each question. Also include sufficient workings to show how you calculated the answer.
- Answers to Section B are to be typed in the text box below each part of each question. Broadly speaking, the amount to write should be relative to the marks to be awarded.
- Upon completion of the exam, save this file as a docx file (including your Student ID in the file name) and upload the file before the Until time.
ANSWER ALL QUESTIONS
- The following EIGHT (8) questions require one or more calculations, to be written in the space provided. Include sufficient workings to show how you calculated the answer.
- Do not change the font style, colour in the answer text boxes.
- Marks for each question are as allocated, for a total of 30 marks.
Question A1 [2 marks]
Spinners Nightclub Ltd (SNL) owns a number of nightclub venues in the towns of Torquay and Geelong in Victoria. SNL has performed an analysis of its historical cash flow balances and has identified the volatility of its daily cash flows as having a daily variance of $2,560,000 ($2.56 million).
The opportunity cost to the firm of holding cash is 0.0173% per day. The fixed cost of buying and selling securities is $100 per transaction. The company has specified in its liquidity policy that the lower cash limit will be $1,500,000.
Spinners Nightclub Ltd uses the Miller-Orr model to manage its cash position. Based on this information, calculate the SNL’s Upper Cash Limit.
Type your answer to A1. here. [This text box will expand as you type}
Question A2 [5 marks]
Combo Cannery Company (CCC) is a US based company that uses steel alloy from a steel producer in Canada to produce cans and containers that are used by food producers in the Great Lakes region of the United States. CCC is considering hedging an account payable of 25 million Canadian dollars that is due in 90 days. The exchange rate is quoted as a CAD/USD exchange rate with the Canadian dollar as the base rate and US Dollar as the terms rate.
As part of its evaluation of the exchange rate transaction exposure, the treasurer at CCC likes to compare the results of a money market hedge relative to using forward contracts before entering into any hedging arrangements. The current spot exchange rate is CAD / USD 0.7490 / 0.7500, whilst borrowing and investment interest rates in both countries are as follows:
United States of America
The hedged cost of using a forward contract is equal to USD 18,869,479.
Specify the amount (in US dollars) that Combo Cannery Company would save if it were to use a money market hedge for the accounts payable, rather than a forward contract.
Type your answer to A2. here. [This text box will expand as you type}
Question A3 [3 marks]
Happy Life Ltd is involved in the distribution of natural health products. The company was originally established in Melbourne in 2017 and is regarded as an established firm with stable levels of net income on a year-on-year basis. In the 2020-21 financial year, Happy Life is expected to have the following financial outcomes:
Net Income ($m)
Allocated EC ($m)
Happy Life’s risk adjusted income is expected to be 80% of the Net Income reported and its weighted-average cost of capital is 15%. Furthermore, it is anticipated (based on previous years) that the company may only utilise 70% of it allocated capital. A charge of 7.0% is applied for capital that has not been utilised.
Determine Happy Life’s Risk Adjusted Return on Capital, assuming that not all capital allocated will be utilised.
Type your answer to A2b. here. [This text box will expand as you type}
Question A4 [2 marks]
SEQ Bank (SEQB) is a small regional bank operating in South East Queensland. The bank has $400 million of assets with a weighted duration of 6.90 years and Equity of $80 million. SEQB’s liabilities have a weighted duration of 1.75 years. The yield curve is currently flat at a yield of 1.5% for all maturities.
If interest rates were to fall by 15 basis points (0.15%), what is the expected change in the market value of NQB’s equity?
Type your answer to A4. here. [This text box will expand as you type}
Question A5 [4 marks]
Car Go Ltd (CGL) is a company that provides food and beverage services for ships operating in Australian coastal waters. It has two business units in Australia (Perth, Sydney and Melbourne). The tables below contain information relating to these business units. CGL applies a hurdle rate of 25% as its expected return on projects.
Capital Allocated ($m)
Risk Adjusted Net Income ($m)
Economic Capital ($m)
Assume the correlation between the business units are as follows:
CGL is considering a re-allocation of capital within the firm and has decided to allocate capital to the Perth business unit using the Marginal Method. Based on the information above, determine the total allocation of capital required to cover the economic capital requirement in Perth.
Type your answer to A5. here. [This text box will expand as you type}
Question A6 [2 marks]
Type your answer to A6. here. [This text box will expand as you type}
WCFC Ltd had sales of $75 million this year (all made on credit). Its accounts receivable balance averaged $2.9 million. How long, on average, does it take NMFC to collect on its sales?
Question A7 [3 + 3 = 6 marks]
In September, an Australian company has a cash receivable of USD 12m due in 6 months’ time and also has a loan repayment of USD 12m due in 1 year. Assume the following are the AUD/USD fluctuations over the next 12 months:
< >Current spot: 0.7750 Spot in six months’ time: 0.7950Spot in twelve months’ time: 0.8100Calculate the overall gain or loss that arises if the company doesn’t hedge the exposure.What is the overall outcome ($ amount of profit or loss) on the BAB futures transactions?
Type your answer to A7a. here. [This text box will expand as you type}
Type your answer to A7b. here. [This text box will expand as you type}
Question A8 [5 + 1 = 6 marks]
A newly incorporated subsidiary of a large financial Institution (FI Sub) has an opening balance sheet comprising assets of $15 million invested in 30-year, 10% semi-annual coupon Treasury bonds selling at par. The duration of the assets has been calculated as 9.42 years. FI Sub has liabilities of $14 million financed through a two-year, 5.25 % semi-annual coupon note selling at par.
< >Calculate the FI Sub’s leverage-adjusted duration gap.Calculate the impact on FI Sub’s equity value if all interest rates were to rise by 20 basis points.
Type your answer to A8a. here. [This text box will expand as you type}
Type your answer to A8b. here. [This text box will expand as you type}
** END OF SECTION A **
ANSWER ALL QUESTIONS
< >The following THREE (3) questions are multi-part questions. ANSWER EACH PART OF EACH QUESTION in the spaces provided. All answers must be in your own words. Any answer that is simply a copy-and-paste (or word-for-word copying) from the lecture slides or other written resources will be awarded a mark of zero.Do not change the font style, colour in the answer text boxes.Marks for each part of the three questions are as indicated (Section total – 40 marks).Part (a) (6 marks)
Big Roo Ltd is an Australian listed company with assets of $800 million and currently has a debt-to-asset ratio of 0.50. Currently the firm has a long-term multicurrency debt facility that is only partially drawn that represents 80% of their debt and a short-term bank accepted Australian dollar bill facility for the remaining 20% of debt.
Big Roo Ltd is considering raising a further $80 million in a short-term multicurrency facility but is concerned about the following strategic financial risks:
(a) Strategic funding availability risk
(b) Facility and debt market risk
(c) Funding technique risk
You are engaged as a consultant to (i) explain each of these forms of funding risk and (ii) in light of the funding requirements for Big Roo Ltd, to discuss how they can manage each of these risks.
Type your answer to B1aa i. here. [This text box will expand as you type}
Strategic funding availability risk (type of risk)
Type your answer to B1aa ii. here. [This text box will expand as you type}
Strategic funding availability risk (how the risk can be managed)
Type your answer to B1ab ii here. [This text box will expand as you type}
Facility and debt market risk (type of risk)
Type your answer to B1ab ii. here. [This text box will expand as you type}
Facility and debt market risk (how the risk can be managed)
Type your answer to B1ac i. here. [This text box will expand as you type}
Funding technique risk (type of risk)
Type your answer to B1ac ii. here. [This text box will expand as you type}
Funding technique risk (how the risk can be managed)
Part (b). (3 + 5 = 8 marks)
The following information applies to both sections (i) and (i) of this Part.
Future Ambitions Limited (FAL) is considering seeking long-term debt from overseas.
Currently FAL does not have a credit rating.
You have been asked to provide advice to FAL in relation to the following:
(i) Identify the THREE reasons why a firm may choose to fund their debt using overseas rather than domestic markets.
Type your answer to B1b i. here. [This text box will expand as you type}
(ii) Discuss, with the use of a number list, the process that ratings agency firms such as Standard & Poor’s apply when issuing a credit rating.
Type your answer to B1b ii. here. [This text box will expand as you type}
Question B2 [6 + 8 = 14 marks]
This question has two parts.
Part (a) [6 marks]
Happy Lotus Ltd (HLL) is a listed company in Singapore with assets of $5,600 million and a current debt-to-asset ratio of 0.60. Currently the firm has a long-term bank financed multi-currency debt facility that represents 60% of its total debt and a Singapore dollar short-term bank overdraft facility for the remaining 40% of debt. At present both facilities are only partially drawn. HLL’s capital policy requires that there should be sufficient revenue available from each of the countries used in the multi-currency facility to cover any drawings.
HLL is considering raising a further $440 million in a 2-year public debt issuance but is concerned about the possibility of funding risks that may arise as a result of the debt issuance. You are engaged as a consultant by Happy Lotus Ltd and are required to complete the following two tasks
< >HLL currently has a public issuer credit rating of A+ from both Standard & Poor’s and Fitch. HLL will need to have the new public issuance rated before it can be issued. To broaden its options, HLL wants to investigate alternate funding in the form of a bank debt facility. Discuss the options available. Include reference to a recent example covered in class.
Type your answer to B2a i. here. [This text box will expand as you type}
Part (b) [3 + 3 + 4 = 8 marks]
Woke Fabrics Ltd (WFL) is a boutique store providing boutique business wear to corporate clients. The business has high turnover of inventory over a 60 day period, offers accounts receivable for corporate clients on a 14 day payment basis (which accounts for 80% of its sales) but must make all payments on its inventory cloth purchases within 28 days of purchase.
The firm currently does not have a cash management strategy and relies heavily on a small bank overdraft account to assist with its liquidity management. Any surplus cash is typically invested in term deposits up to a maximum of 90 days. You have been appointed by WFL to assist with their cash and liquidity management
< >Identify and explain the potential sources of any liquidity risk that may currently be affecting WFL.Explain how WFL can use a Cash Flow Gap analysis to identify and manage any exposures that it may currently have.Identify and discuss two (2) techniques involving its cash conversion cycle, which WFL can use to manage its liquidity risk.
Type your answer to B2(b)i. here. [This text box will expand as you type}
Type your answer to B2(b)ii. here. [This text box will expand as you type}
Type your answer to B2(b)iii. here. [This text box will expand as you type}
Question B3 [12 marks]
Type your answer to B3 here. [This text box will expand as you type}
The year 2020 has presented many challenges to risk management specialists in the tertiary education sector. Identify two significant financial risks faced by the sector and discuss risk mitigation techniques available from the Treasury (Risk) Management toolbox.
A spare textbox. [This text box will expand as you type}
** END OF SECTION B **
** END OF EXAM **