Professional Documents
Culture Documents
Section A
Descriptive questions
(Answer any TWO questions from 1-4. Case study questions 5 and 6 are COMPULSORY)
1. What are money market instruments? How are they relevant to the corporate treasury
function? (Unit 2)
2. Write short notes on:
a. RBIs role in the money market (Unit 5)
b. Traditional and evolving functions of Treasury (Unit 1)
c. Interest rate risk management and its relevance to corporates (Unit 9)
3. What is financial risk? How is it different from liquidity risk? How can ERM help in
coping with financial risk? (Unit 10)
4. Present a comparative analysis of:
a. Working capital management v. Working capital financing (Unit 12)
b. Transaction risk v. Translation risk (Unit 11)
c. Decentralised treasury v. Centralised treasury (Unit 13)
Investment in the plant is expected to cost $10 million. Working capital is budgeted at $5
million initially and expected to stay constant throughout the project. Plant will be
depreciated over 5 years on straight line basis for tax purposes.
Over the 5-year period selling price per laptop will be $500 converted to Indian rupees at the
prevailing exchange rates at the time of sale. Operating expenses are expected to be the rupee
equivalent of $250 per laptop.
High Ground will finance the project with a debt/equity ratio of 0.50. The debt will be raised
in rupees and the company will pay interest @ 10% (expected market borrowing rate). The
principal will be repaid in 4 equal annual instalments from end of year 2.
The cost of capital for High Ground is 19%. The corporate tax rate is 35% in India and
because of a double taxation treaty between India and the US no further taxes are payable by
High Ground in the US on its incomes from the project.
It can be assumed that investment is made at the beginning of year 1 and inflows happen at
the end of every year from year 1 through 5.
The current exchange rate is Rs 62/$. You can assume that exchange rates will remain at this
level during the project.
Questions
1. Calculate the project NPV as well as the equity NPV of the High Ground project.
2. What are the key factors of success of the project? Discuss the sensitivity of the project to
the key factors and ideate on fall-back plans that High Ground can consider to reduce the
risk.
Deepak, the MD of a furniture manufacturer in Nagpur meets Sub hash and proposes to him
that AHA should outsource manufacture to his firm, which has a brand new factory with
excellent process skills. Deepak offers that the products can be sold under the AHA brand
name, and suggests that Subhash closes down his factory and establishes a marketing unit
with branches and revive AHAs fortunes. He is keen on signing a five-year contract.
Subhash finds the offer interesting and asks for details. It turns out that the project will cost
AHA Rs 60 million. The earnings before interest and tax from the revamped setup would be
Rs 24 million every year, and prima facie the economics look very attractive.
The problem before Subhash now is: how to finance the project?
The options before him are:
1. A rights issue at the price of Rs 17 per share
2. Long-term bank loan @ 14% interest
Rs million
320
2,560
Total assets
2,880
Funded by
Debt capital
2,220
Equity:
Share capital (shares of Rs 10 each)
400
260
660
2,880
For the last year profit after tax was Rs 80 million and dividend declared and paid 12.5%.
The project is expected to yield EBIT of Rs 24 million per annum for 5 years.
Questions:
1. Is it worthwhile for Subhash to consider the project? How would you evaluate its merits?
2. How should Subhash evaluate the two financing options from the perspective of treasury
risk v. return? What are the pros and cons of the two methods of financing proposed?
Note: Make sure that you take into account qualitative factors as well as quantitative, in doing
your analysis and stating your recommendations.
Section B
Answer the following one mark questions from (1-50) (50*1 = 50 marks)
1. A corporation must have a team in place to deal with events that impact the
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d. Converted
38. Translation exposure can also be termed as ___________________ exposure.
a. Cash flow or liquidity
b. Accounting or balance sheet
c. Economic or sovereign
d. Conversion or exchange
39. The exposure dealing with the actual cash flows involved in settling transactions
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(2*25=50 marks)
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a. Short-term, long-term
b. Equity, debt
c. Strategic, contingency
d. Capital expenditure, operating expenditure
A major factor in the amount of cash available for use is ________________________.
a. Payment float
b. Collection float
c. Deposit float
d. Collection and deposit float
From the following statements on risk mitigation, pick the correct one.
a. Fault tree analysis (FTA) is a specific method used to mitigate risk
b. Risk calculation is a tool that measures risk
c. The Process Decision Program Chart tool is useful for new businesses in
identifying the risk of failure
d. Insurance is a specific method used to mitigate risk
The different types of liquidity risks are _________________________.
a. Competitor activity, major mishaps and unexpected statutory demand
b. Funding risk, timing risk and call risk
c. Payment risk, collection risk and bankruptcy risk
d. Failure of equity issue, failure of debt issue and inadequacy of retained
earnings
Alternative scenarios are used to _________________________.
a. Tabulate liquidity gap profiles
b. Review assumptions related to the companys assets and liabilities
c. Compare the companys structural and dynamic liquidity gaps
d. Determine a companys liquidity under different conditions
Pick the correct statement from the following statements on interest rate risk
management.
a. Watching market interest rates is irrelevant for a companys interest rate risk
management (IRRM) program
b. An IRRM program need not be independently reviewed
c. IRRM should be an important item in the regular internal audit program
d. Annual reporting on IRRM to shareholders is a crucial aspect of IRRM
Pick the correct statement from the following statements on interest rate theories.
a. The core focus of interest rate theories is on reasoning out interest rate
movements
b. The focus of interest rate theories is on short-term interest rate fluctuations
c. The focus of interest rate theories is on long-term interest rate movement
d. The focus of interest rate theories is on productivity of capital
A strong capital budgeting system based on the right ____________________________
mitigates investment risks.
a. Timing of the expenditure
70.
71.
72.
73.
d. Sovereign risk
The risk of a counterparty failing to meet the obligations in a financial deal after the
bank has fulfilled the obligations on the date of settlement of the contract is known as
___________.
a. Pre-settlement risk
b. Settlement risk
c. Position risk
d. Cross-country risk
Operating cash cycle is the period during which _____________________________.
a. Cash has to be kept idle
b. Cash stays invested in the working assets of the business
c. The customer does not pay the bill and the cash does not come in
d. From the time materials are bought till they are manufactured and sold
The basic methods of financing working capital are ______________________.
a. Bank loans and Equity
b. Debentures and Bank overdrafts
c. Spontaneous financing and planned financing
d. Public deposits and Retained earnings
An evolved Treasury organisation can be described as follows: (pick the correct
description).
a. A fully centralised Treasury
b. A fully decentralised Treasury
c. A Treasury that functions as a profit centre
d. A Treasury that focuses on corporate-wide cash flow
Choose the correct one from the following comments on treasury products