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Cfm 305 Treasury Management Question Paper
Cfm 305 Treasury Management
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2011
UNIVERSITY EXAMINATIONS: 2011/2012
YEAR 3 EXAMINATION FOR THE BACHELOR OF COMMERCE
CFM 305 TREASURY MANAGEMENT (SUNDAY)
DATE: APRIL 2012 TIME: 2 HOURS
INSTRUCTIONS: Answer Question One and Any other Two Questions
QUESTION ONE
i. State and explain the advantages and disadvantages of operating treasury as a profit centre.
[5 Marks]
ii. State and explain the main objectives of treasury management. [5 Marks]
iii. Suppose that it is now on 1 January 2012 and the spot rate of the pound is dollars 1.50. The UK
and US interest rates are 6% and 8% per annum respectively. What would we expect the one year
forward rate to be? [5 Marks]
iv. An item costs 100 pounds in UK and Austrian dollars 150 in Australia. The current exchange rate
is ; A Dollar 1.50= 1 pound. Explain what happens if inflation which is currently 0 in both
countries increases to 10% in Australia. [5 Marks]
v. The kidwelly Sweetie Company in the UK exports confectionery to a number of department stores
in the USA and Europe. It is due to receive US Dollars 12,000 in six months time from goods
supplied to a US customer.
The six month US Dollar forward rate is 1.4550-1.4600
The spot rate is 1.4960-1.4990
The interest rates in the two countries are s follows;
Borrow lend
USA 12% 9%
UK 14% 10%
Required; Calculate the sterling receipt if the company decides to hedge using a forward
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contract and money market hedge. [10 Marks]
QUESTION TWO
i. Suppose the pound sterling is bid at dollars 1.9724 in New York and the euro is offered at
dollars 1.3450 in Frankfurt. At the same time London banks are offering the pound
sterling at euros 1.4655.
Required;
Show the steps an astute trader would follow to earn a risk-less profit through a triangular
arbitrage. Assume that the trader begins in New York with dollars 1,000,000. [6 Marks]
ii. Assume you have Ksh. 10 M to invest for 6 months. The current spot rate of the Tsh is
Ksh 0.058.The three months forward rate of the Tsh is Ksh 0.06. The interest rate in
Kenya is 9% per annum while in Tanzania is 15% per annum.
Required:
Calculate the gain from covered interest arbitrage. [6 Marks]
iii. Assume that the Tsh exhibits a 6 month interest rate of 20% pa while the Ksh exhibits a
6 month interest rate of 14% pa.
Required;
a. Compute the forward rate premium of the Tsh with respect to the Ksh according to interest
rate parity. [2 Marks]
b. If the current spot rate of the Tsh is Ksh 0.06 compute the six month forward rate of the Tsh
with respect to the Ksh. [2 Marks]
c. Compute the gain from covered interest arbitrage to a Kenyan investor with ksh 10 million
for a six month period. [4 Marks]
QUESTION THREE
Pokea Cellphone Operators Ltd. started operations on 1 September 2010. The company raised the
required equity capital of Sh.65 million and debt at an annual rate of interest of 18% before
commencing business. Given below are some statistics extracted from the books of the company in
respect of the financial statements prepared to 31 August 2011.
3
Sh.’000’
Total fixed assets (Net book value)
Operating costs (excluding debt interest)
Dividends declared and paid
Cash and bank balances
75,000
39,150
4,220
3,125
Eighty percent (80%) of the sales were on credit. The current assets on 31 August 2011 consisted of
only stock, debtors and cash and bank balances as given above, while current liabilities consisted of
only creditors and tax provided for in respect of the year to 31 August 2011. Taxation was provided
for at the rate of 30%.
You are also provided with the following ratios which have been determined from the financial
statements of Pokea Cellphone Operators Ltd.
Fixed assets turnover
Gross profit margin
Stock turnover
Interest cover
Average debt collection period (based on 360 days of the year)
Current ratio
1.8 times
45%
4.4 times
4 times
84 days
2.5:1
Required:
(a) In respect of the year ended 31 August 2011 you are required to prepare the company’s:
(i) Trading profit and loss account. [10 Marks]
(ii) Balance sheet. [10Marks]
QUESTION FOUR
i. Fanaka Ltd, a large multi-national company, is in the process of determining the optimal cash
balance for the year ending 31 December 2011.
The management of the company has established the following information:
4
The company’s annual cash requirements amount to sh.4.5 billion.
The cost of each cash conversion transaction is sh.1000.
The opportunity cost of funds is 10%
Required
Optimal cash balance that the company should hold
Total cost of maintaining the cash balance determined in (b) (i) above. [10 Marks]
ii. The following data relates to a given company:-
i) The minimum cash balance sh.8,000
ii) The variance of the daily cash flows for the company sh.4m
iii) The transactions cost of buying or selling the security sh.50
iv) The interest rate of 9.125% per annum
Required
Formulate the decision rate using the Miller and Orr’s model. [10 Marks]
QUESTION FIVE
ABC Ltd is preparing its budget for the four months commencing 1st jan 2011. The company makes
and sells a single product. The details of the product are as follows:
Selling price sh 400 per unit
Direct material sh50 per unit
Direct labour sh 100 per unit
Variable overhead sh 60 per unit
The following information is also available
NOV
2010
DEC
2010
JAN
2011
FEB
2011
MAR
2011
APRIL
2011
Sales
(units)
1300 1500 1700 1500 1800 1800
Production
(units)
1400 1500 1800 2000 2200 2200
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Additional information
?? Fixed overhead is budgeted at sh 70,000 per month including depreciation of sh 10,000
?? Wages are paid 75% during the month in which they are earned and 25% the month following
?? Variable overhead is paid in the month in which its incurred
?? Material costs are paid two months after the material is used in production.
?? There is a tax liability of sh 140,000 to be settled in February.
?? The company will purchase a new machine for sh 200,000 in January. The present machine will be
sold for sh 30,000 receivable in March.
?? 5% of the monthly sales are for cash. The remainder will be sold on credit with debtors settling
one month after the sales
?? The cash balance on 1stjanuary 2011 is expected to be sh10,000
Required:
Prepare the cash budget for the four months commencing on 1st January 2011.
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