FIN3703 Assignment 1 (DETAILED ANSWERS) Semester 1 2025 - DISTINCTION GUARANTEED

FIN3703 Assignment 1 (DETAILED ANSWERS) Semester 1 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ,. QUESTION 1 (2) Treasury management is executed in any business, irrespective of its size, structure, or industry. Which of the following activities does not fall directly under the corporate treasury management functions in business? a. The management of cash, liquidity, and banking relations. b. The management of the cost of capital, capital structure and dividend pay-out. c. The management of financial, operational, and strategic risks. d. Management of cash forecasting, cash surpluses and cash deficits. Circle the correct option below: 1. a and b 2. a and c 3. b and c 4. a and d QUESTION 2 (2) Which of the following statement(s) below are correct about the interest rate swaps. An interest rate swaps involves counterparties who want to exchange … a. a floating rate committement for a fixed rate. b. long-term debt for equity. c. short-term debt for long-term debt. d. fixed assets with current assets Circle the correct option below: 1. a 2. a and c 3. a and b 4. b and d FOR QUESTIONS 3 TO 6, REFER TO THE FOLLOWING INFORMATION: BestDairy Holding is a dairy-and-fruit juice blend holding company that was launched in South Africa by Parmalat in 2005. Parmalat has four subsidiaries, one in Limpopo, one in Gauteng, one in Kwazulu-Natal (KZN) and one in Northwest and its headquarters are situated in Midrand where all finances are handled. The four subsidiaries have individual bank account with different banks. Each subsidiary can finance its deficit with an overdraft facility at a rate of 10% and invest the surplus cash, which will earn the company 7% in interest. The Master and subsidiaries’ bank accounts reflect the following balances: The Limpopo subsidiary has a debit balance of R400 000. The Gauteng subsidiary has a credit balance of -R350 000. The KZN subsidiary has a debit balance of R200 000. The Northwest subsidiary has a debit balance of R100 000. The master account has a debit balance of R. QUESTION 3 (2) Suppose the Gauteng subsidiary is informed that it must finance its cash deficit with a revolving credit from Capitec Bank. Calculate the interest that the subsidiary will pay should it uses the funds for 29 days and that the interest is calculated on the daily basis the box provided below. (Use 365 days.) QUESTION 4 (2) If Parmalat does not arrange for cash pooling and every subsidiary handles its cash separately with its individual bank account. Calculate the net or combined interest amount payable/earned by the four subsidiaries in the box provided below. (Assume the funds remain static for a year) QUESTION 5 (2) Suppose the central treasury at Midrand decides to arrange with the subsidiaries’ banks to pool all its cash balances in a central master account daily leaving the subsidiary accounts with zero balances, calculate the amount that will represents the balance of the master account in the box provided below. QUESTION 6 (2) Calculate the value (advantage) that the holding company will add by pooling cash from its five subsidiary accounts to the master accounts in the box below. QUESTION 7 (2) An analysis of Parmalat’s operations indicates that the company is not exposed to …risk. Circle only one correct option below. a. interest rate b. liquidity c. transactional d. counterparty QUESTION 8 (2) Which of the following statements are correct about the purpose of pooling cash to a single concentration account? a. To reduce the dependency on long-term financing from financial institutions. b. To improve cash and liquidity management from the subsidiaries’ point of view. c. To use concentrated cash for large short-term investments. d. To use concentrated cash for faster cash disbursements. Circle the correct option below. 1. a and b 2. b and c 3. a and c 4. c and d QUESTION 9 (2) The market for newly issued securities and the market relatively long-term maturity or more than one year’s, maturity for financial instruments is known as the … market and …market respectively. Circle the correct option below: a. primary; secondary b. secondary; capital c. money; capital d. primary; money FOR QUESTIONS 10 REFER TO THE FOLLOWING ARTICLE: AN EMPLOYEE OF KPMG HAS BEEN ACCUSED AND ARRESTED FOR FRAUD OF R6.5M KPMG hired Mr Douglas as a bursary specialist to oversee bursary payment to university students. It is alleged that, instead of paying university fees on behalf of students, Mr Douglas misdirected bursary money into bank accounts belonging to friends and people who own companies between 2021 and 2022. These friends and companies then transferred the money into his bank account. KPMG suffered a loss of R16.5 million due to his fraudulent actions. QUESTION 10 (2) Based on the above article, it can be concluded that Mr Douglas executed the tasks of the … office/s. Circle the correct option below: a. front b. middle c. back d. front and back FOR QUESTIONS 11 AND 12 REFER TO THE FOLLOWING INFORMATION: You have been presented with the following information about the Treasury Bills (TBs) that are trading in the secondary market: Bid/offer = 9.62%/9.40% Face value = R100 000 Days to maturity = 45 (Note: Use 365 days.) QUESTION 11 (2) Which of the following statements is incorrect? Circle the incorrect option below: a. The price maker is prepared to buy TBs at 9.62%. b. The price maker is prepared to sell TBs at 9.40%. c. The above bid would translate into a price of R98 823.972. d. The above offer would translate into a price of R98 836.28. QUESTION 12 The yield to maturity associated with the bid is equal to … Circle the correct option below: a) 9.62%. b) 9.64%. c) 9.66%. d) 9.69%. QUESTION 13 (2) Match column A with column B below: Column A Column B 1. Risk a.The maturity at which the excess cash is invested should match the time that it will be required. 2.Time frame b.The ease of realising invested cash should be considered. The instrument should be marketable and have a ready secondary market. These investments can be made only in near-cash securities only. 3.Treasury policy c. Return should not be sacrificed at the expense of high-risk securities. 4.Liquidity d. Detailed guidelines on the money market instruments that are approved for treasury when investing surplus cash. e. The assignment of decision-making, delegation of authority along with the responsibilities and distribution of power to each level of management The correct option/match is … Circle the correct option below: a, 1;c, 2;d, 3;e, 4;a b, 1;d, 2;a, 3;c, 4;b c, 1;a, 2;b, 3;e, 4;c d, 1;c, 2;a, 3;d, 4;b QUESTION 14 (2) Which of the following options represents a task or tasks that is/are performed in the back office? Circle the correct option below: a. Managing risk b. Checking and providing the support required to avoid errors. c. Buying and selling financial instruments. d. Identifying the risk that the business is exposed to. QUESTION 15 (2) Which of the following control procedures are elements of a key risk mitigation strategy? a. Using standard settlement instructions for all transactions. b. Enforcing a one-way transaction system in treasury. c. Segregating treasury duties according to front, middle and back offices. d. Executing audit trails and continuous reconciliations of transactions. Circle the correct option below: 1. a and b 2. b and c 3. b and d 4. a, c and d QUESTION 16 (2) Which of the following activities or processes would involve cross-border multi-currency pooling? a. DyChem Ltd, a company that manufactures consumer chemicals in South Africa, pools rands to a concentration account situated in Midrand. b. Adco Holdings, a company with various subsidiaries in France, pools European euros to its concentration account of its head office in Paris. c. BNP Constructions, a civil engineering constructor of roads in Micronesia, pools US dollars to a master account of its holding company in Pilikir. d. Dely Petroleum, a supplier of oil products in Nigeria and the USA, pools Nigerian naira and US dollars to its headquarters in Abuja. Circle the correct option(s) below: 1. d 2. a and b 3. a, b and d 4. a, b and c QUESTION 17 (2) Which of the following are advantages of a decentralised treasury? a. There is more flexibility in decision-making. b. The coordination of all activities is very easy for treasury. c. It empowers employees when it is well implemented. d. Quick decisions can be made and executed by authorities. Circle the correct option below: 1. a, c and d 2. a and b 3. a, b and c 4. a, b and d QUESTIONS 18 (2) The consideration value of a Treasury Bills (TB) with a nominal value of R, issued for a period of 91 days at a discount rate of 12.10% equal to... Circle the correct option below: a. R 869 831, 867. b. R 891 831, 867. c. R 929 371, 867. d. R 969 871, 867. NB: use 365 days. QUESTION 19 (2) Which of the following tasks is not the responsibility of the corporate treasury? Circle the correct option below: a. cash and liquidity management. b. transaction collection and record management. c. Working capital and risk management. d. Banking relation and risk management. QUESTION 20 (2) An increase in the Treasury Bill discount rate …the consideration value. Circle the correct option below: a. has no effect on b. increases c. decreases d. cannot be determined by FOR QUESTIONS 21 TO 26 REFER TO THE FOLLOWING INFORMATION: The Bookkeeper of Fruits (Pty) Ltd is forecasting the company’s short-term financing needs, and you as a corporate treasury management student, have been requested to assist in determining these needs and the possible costs of financing. The following information has been gathered and passed on to you. The bookkeeper extracted an aging report from the system and determined that 40% of sales were paid for in the same month that the sales were made, the remainder of sales were paid one month later. The company has access to a R revolving credit facility (line of credit) at a cost of 12% interest per year, assuming 365 days per year. No administrative fees are applicable. All purchases and other expenses are done in cash. Sales for August, September and October were as follows: November December January R500 000 R600 000 R400 000 Expected sales for November, December and January are as follows: February March April R300 000 R400 000 R800 000 Additionally, purchases amount to 50% of sales and other costs amount to R200 000 per month. QUESTION 21 (2) Calculate the total sales that is collected one month after the sales have taken place for February, March and April in the box below. QUESTION 22 (2) Calculate in the box below, the total cash receipts for February, March and April. QUESTION 23 (2) Calculate in the box below, the total net cash inflows/ outflows for February, March and April. QUESTION 24 (2) The financing costs for March and April are … respectively Circle the correct option below: a. R300 and R500 b. R600 and R400 c. R500 and R700 d. R600 and R800 QUESTION 25 (2) Calculate the below the total financing cost for April. QUESTION 26 (2) Which of the following statements are correct regarding compiled cash budget of Fruits (Pty) Ltd? Fruits (Pty) Ltd.’s cash budget indicates … a. its cash position based on operations. b. its cash surplus and deficits. c. a need for short-term borrowing. d. Its financial income and position. Circle the correct option below: 1. a, b and c 2. a, b and d 3. a, c and d 4. a, b, c and d SECTION B (30 MARKS) QUESTION 1 Read the following case study and answer questions 1 to 3 Sparks Ltd is a recently formed company aiming to provide alternative energy solutions to a broad market. The company imports and pays all its inventory (inverters, solar panels, and battery packs) in cash and sells them on cash and credit. The company is in the intermediate stages of planning to build its own local assembly line. The most favoured plan amongst management is to purchase components overseas and then assemble inverters, solar panels, and battery packs locally. To build a local assembly line, the company require an initial investment of R2 million which will be raised as a loan from Standard Bank at a fixed interest rate of 11% per annum. In financing working capital, the company secured a total revolving credit limit of R170 000 from Capitec bank at an interest of 12.2% per annum. The objective of this case study is to: • Identify all significant risks inherent in the operational activities of Sparks Ltd. • Provide the management of Sparks Ltd with a clear risk mitigation strategy. REQUIRED 1. Identify, define and discuss different types of financial risk that Sparks Ltd is exposed to. 2. Explain how Sparks Ltd can mitigate the financial risk that it is exposed to and provide/relate 1 real-world (practical) example for each risk identified by using companies listed at Johannesburg Stock (JSE) (16) NOTE: Marks will be allocated as follows: Eight marks for discussing theory and 8 marks for providing real-world practical application/example). 3. Calculate the interest payable on the revolving credit that they secured from Capitec bank if the business used 20% of the revolving credit limit for 30 days and that interest is calculated on the daily basis. (Use 365 days). (2)