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SIKKIM MANIPAL UNIVERSITY - DDE

Master of Business Administration MBA Semester I

MF0016Treasury Management (Finance) 4 Credits

(Book ID -B1814)

Model Question Paper Key Answers

Duration: 3 hours Total marks: 140

Section A

Descriptive questions (4*10 marks = 40 marks)

(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)

Case Studies (Compulsory)

1. High Ground Hardware Systems Inc. USA

High Ground Hardware Systems Inc. USA (High Ground) is mulling the manufacture and

sale of computers in India. Target for the first year is 20,000 laptops and volume growth of

10% every year. High Ground plans to operate the project for 5 years and dispose of the plant

and working capital at the end of year 5. High Ground expects that all net cash flows will be

permitted to be repatriated to USA every year.

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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.

2. Aashirwad Home Appliances Ltd

Aashirwad Home Appliances Ltd (AHA) is a 20-year-old company making and selling home

appliances and office furniture from its factory in Coimbatore. Its products have a good name

in the market, but recently AHA has been finding it difficult to maintain its quality image

because of manufacturing defects. Its plant is old and AHA feels this could be the main

reason for quality issues. Sub hash, the managing director, is worried.

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

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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

The latest balance sheet of AHA (abridged) is as follows: Rs million

Fixed assets (net) 320

Current assets (net of current liabilities) 2,560

Total assets 2,880

Funded by

Debt capital 2,220

Equity:

Share capital (shares of Rs 10 each) 400

Reserves & surplus 260 660

Total liabilities & capital 2,880

Some other information:

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.

The tax rate is 35% and cost of capital of AHA is 18%.

AHA shares sell in the range Rs 17-19 in the secondary market.

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.

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Section B

Answer the following one mark questionsfrom(1-50)(50*1 = 50 marks)

1. A corporation must have a team in place to deal with events that impact the

________________ of financial results.

a.

Internal reporting

b.

External reporting

c.

Quarterly reporting

d.

Annual reporting

2._______________ policies deal with handling cash deficits and disposal of cash

surpluses.

a. Treasury risk

b. Foreign exchange fluctuation management

c.

Liquidityd. Treasury reporting

3. Money markets are used by organizations that need to borrow, lend or invest

______________. (Complete the sentence)

a. For the short-term, meaning periods up to one year

b. For very brief periods of a week or less

c.

For the long term, meaning periods in excess of one year

d. For periods of all durations

4.___________ is/are used by the central banks for conducting open market operations.

a.

Stock marketb.

Debt market

c. Call money market

d.

T-Bills

5.___________ are drawn by the seller on the buyer for the value of goods delivered by

the seller.

a. Accommodation bills

b.

Bills of exchange and hundis

c. Only bills of exchange

d.

Promissory notes6. Certificates of deposit are _________ (complete the sentence)

a.

Receipts issued by corporates to investors in their public deposits

b. Acknowledgements of interbank deposits

c. Freely negotiable certificates of deposits made by banks in corporate entities

d. Freely negotiable certificates of deposits made by investors in banks

7.________ and _______ markets are the two segments of equity market.

a.

Debenture market and Bond market

b. Primary market and Secondary market

c.

Debt market and Share market

d. Premium market and Discount market

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8. SEBI prohibits ______________ as part of its regulatory measures.

a. Issue of shares at a discount

b. Margin trading

c. Trading in foreign exchange

d.

Insider trading9. Foreign institutional investors are: (Choose the correct definition) (1)

a.

The only foreign entities authorized to invest in India

b. Non-resident Indian individuals

c.

Foreign banks with branches in India

d. Foreign arms of Indian companies

10. In ___________ method, foreign exchange rate is quoted as domestic currency per unit

of foreign currency.

a.

Cross

b.

Indirectc.

Direct

d.

Forward

11. In forward contracts the receiver of delivery ____________.

a.

May change with time.

b.

Is known.

c.

Is not known.

d.

Is always the bank.

12. Forward and futures contracts often work ___________.

a.

without any correlation

b.

In tandem

c.

Against one another

d.

Together, and so double the risk/return.

13. In case of options, underlying asset refers to the ______________________________.

a. Amount per share that an option buyer pays to the seller

b. Total value of the transaction

c. The net asset value of the option buyer

d.

Value of the security based on which the options have been generated

14. The process of removing excess money supply is known as _______________.

a.

Interventionb.

Sterilised intervention

c. Bond issue to banks

d.

Purchase of US$ from banks

15.__________ refers to relaxing controls on capital account transactions.

a. Capital account convertibility

b. Current account convertibility

c. Liberalized Exchange Rate Management System (LERMS)

d. Unified exchange rates

16.

Formulation of FEDAI guidelines and rules for forex business is_________________________.

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a. The sole function of Foreign Exchange Dealers Association of India

(FEDAI)

b. Not in the purview of FEDAI

c. One of the functions of FEDAI

d.

The function of RBI in which FEDAI plays an advisory role.17.___________ refers to the loans arranged by the importer for payments of imports in

India from a bank outside India for maturity less than three years.

a. Exchange Earner's foreign currency (EEFC) account

b.

Supplier's credit

c. Buyer's credit

d.

NOSTRO account

18. The liquidity of an organization depends on the organizations ___________ need for

cash.

a.

Short-termb.

Long-term

c. Total

d.

Daily

19. In taking care of the risk element, one of the features of a liquidity plan is

__________________.

a. The capital budget

b. The operating budget

c. Listing fall-back action options

d.

Long-term strategy of the company20._________________ is the ratio that sets the minimum cash balance that each bank

must hold.

a.

Statutory liquidity ratio

b. Cash reserve ratio

c.

Liquidity ratio

d. Debt service coverage ratio

21. Avoiding _________ _____ is one of the reasons for the requirement of liquid assets.

a. Bankruptcy

b.

Equity financingc. Long-term debt

d.

Compulsory high-cost debt

22. One of the major risks companies experience in the domain of personnel is

________________.

a. Idle time

b.

Production of defectives

c. Work-related physical violence

d. Absenteeism

23.

Inventory risk occurs as a result of ________________________.a. Failure of salespeople to make sales

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b. Problems arising in quantity and quality of manufactured products

c. Accumulation of inventory

d. Damage to the inventory by natural and manmade causes

24. Altmans model and a few other credit score formulae have been developed to measure.

a.

Liquidity riskb. Market risk

c.

Foreign exchange risk

d. Credit risk or default risk

25. Risk reduction leverage is defined as ____________________________.

a. Return on investment in the business

b.

Reduction in Risk Exposure Cost of countermeasure

c. Debt capital equity capital

d.

Analysing, classifying and quantifying risk

26.

A party is interested in trading an asset but there is no buying party. This is an exampleof a _____________________.

a. Market risk

b. Exchange risk

c. Liquidity risk

d. Credit risk

27. Failure of __________________ is a technical liquidity risk.

a. Markets

b. Payment system

c. Government

d.

RBI

28. The risk that occurs when reserve fund sources do not materialize resulting in lost

business opportunities is known as ____________________

a. Timing risk

b. Call risk

c. Funding risk

d. Technical failure risk

29._____________________ are the two different ways of measuring liquidity.

a. Maturity ladder and contingency plans

b.

Stock approach and Flow approachc. Net funding requirement and market access

d. Backup liquidity and strategy

30. Interest rate risk management (IRRM) does not deal with ___________.

a. Re-pricing risk

b.

Yield curve risk

c. Exchange risk

d. Basis risk

31. Interest rate is an important constituent of ____________________.

a.

Cost of capitalb. Market capitalization

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c. Cost of debt capital

d. Cost of equity capital

32.__________________ refers to the risk occurring in the future price of underlying asset.

a. Reinvestment risk

b.

Price riskc. Rate level risk

d.

Volatility risk

33.______________________ suggested interest rate as the component which balances

savings with investment.

a. Classical theory

b.

Abstinence theory

c. Loanable funds theory

d.

Liquidity preference theory

34.

The dimensions of financial risk are ____________________________________.a.

Interest, foreign exchange and fundraising

b. Shareholder relationship, financial market and lenders

c.

Financial reporting, cash management, cost management and compliance

management

d. Accounting, reporting and disclosure

35. Foreign exchange risk comprises risks of _________________________________.

a. Choice of currency and currency movement

b. Transaction and translation

c.

Failure to book forwardd. Contracting issues with the foreign party

36. A_______________ elaborately lists out all statutory payments, filings, returns and

other compliances required in the business.

a. Financial Policy Manual

b.

Financial procedures Manual

c. Strategic checklist

d.

Statutory checklist

37. Currency swaps can be ____________; transactions do not have to be completed.

a.

Netted outb.

Extended

c.

Cancelled

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

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39. The exposure dealing with the actual cash flows involved in settling transactions

denominated in a foreign currency is called ___________.

a. Total exposure

b. Translation exposure

c.

Transaction exposure

d. Economic exposure

40. Companies are not allowed to _____ in foreign currencies as a business by itself. Only

_________ are licensed to do so.

a. Invest, banks

b. Borrow, FEDAI dealers

c. Trade, banks

d. Trade, FEDAI dealers

41.

A business must have some idle cash and unused bank balance for ________________.a.

Buying fixed assets

b.

Repaying loans

c.

Spot payments

d. Payment of dividends

42. Every company should _____________ its operating cash cycle and broadly know the

amount of capital that will be required. 1

a.

Control

b.

Plan

c.

Quantifyd. Reduce

43. ABC analysis of ________________________ is an excellent device to devote focused

attention to high-value inventories.

a. Finished goods

b.

Raw materials

c.

Stores & spares

d. Work-in-process

44. A derivative product is _______________________________.

a.

A financial product the value of which is independent of any financial asset

b. A financial asset that is traded in a foreign market

c. A financial product that derives its value from the underlying financial asset

d. A financial asset that is traded in the secondary market

45. Market risk is the risk arising from _______________________.

a. Trying to raise money in a volatile capital market

b.

Rise or fall of the companys product or service in the market

c. Raising debt capital at exorbitant rates of interest

d.

Unfavourable conditions and fluctuations in market prices

46.

Liquidity risk could arise from __________________.

a.

Implementation of unrealised transactions

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b. Realised and unrealised transactions

c. Realised transactions

d. Forex assets and liabilities on the balance sheet

47. Treasury deals with ______________ cash.

a.

Dailyb. Short-term

c.

Long-term

d. Liquid

48. Treasury with its own trading and investment activity has developed into a

___________. Choose the correct answer.

a.

Profit centre

b. Cost centre

c.

Service centre

d.

Responsibility centre49. Treasury uses _____________________ to control the cost of funds.

a.

Bank assistance

b. Forward booking

c.

Hedge and risk management

d. Interest rate swaps

50.___________ refers to an agreement between two parties to exchange currencies at a

certain exchange rate and at a certain time in future.

a. Swaps

b.

Convertible bondsc. Government securities

d. Forward contracts

Answer the following two mark questions from (51-75) (2*25=50 marks)

51. Globalization of business has thrown up opportunities for optimizing the

_________________ and minimizing the _________ of funds.

a. Utilization, cost

b. Circulation, fluctuation

c.

Cost, regulationd. Generation, requirement

52. Operators in the unorganized sector are _________________. (Complete the sentence)

a.

Banks other than nationalized banks, NBFCs and non-corporate borrowers

b. Unregulated financial intermediaries, indigenous bankers, private

moneylenders and corporate and non-corporate small businesses.

c. Foreign institutional investors and big multinational corporates

d. Mutual funds and individual borrowers and lenders

53. Regulation of money market has the following objectives (pick the best option).

a.

Control the commercial banks money market transactionsb. Keep inflation and rupee exchange rate under check

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c. Regulate operations of non-banking finance companies

d. Effectively prevent liquidity mismatch, communicate monetary policy and

changes in policy, and expanding the markets

54. Information asymmetry in the capital markets refers to a situation in which (complete

the sentence appropriately):a. False information provided by a participant is the basis for a trading decision.

b.

A participant uses inside information and benefits from it.

c. One of the participants in the transaction has more or superior information

compared to the other.

d. The actual information is different from the forecast based on which the

decision was taken.

55. Of different types of share issues, the following are governed by SEBI (choose the

correct option).

a.

All public issues including rights issues and preferential issues made bycompanies

b. Initial Public Offers (IPOs) only

c.

Only issues of shares at a premium or discount

d. Only preference share issues

56. Pick the correct statement about a country's exchange rate fluctuations from the

following.

a. A countrys exchange rates will not be impacted by its economic ups and

downs.

b.

Exchange rate fluctuations do not have any effect upon an economy's health.c. A countrys exchange rates will be impacted by its economic ups and downs.

d. If the economy is strong and booming the exchange rate fluctuations will

always be favourable.

57. Selling hedge happens when __________________.

a. a business needs a currency at a future date and buys a forwards contract to

protect against upward price movement

b. a business holds a currency and buys a forward contract to protect against

downward price movement

c.

a bank expects a downward price movement and trades in the futures marketto make profits

d. a bank expects an upward price movement and trades in the futures market to

make profits

58.____________ plays a catalytic role for smooth functioning of the markets with close

co-ordination with RBI and other organizations. Choose the correct answer.

a. Fixed Income and Money Market Derivatives Association (FIMMDA)

b.

Authorised forex dealers

c. Foreign Exchange Dealers' Association of India (FEDAI)

d.

Commercial banks

59. Liquidity planning comprises two steps: ________ planning and ______ planning.

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a. Short-term, long-term

b. Equity, debt

c. Strategic, contingency

d. Capital expenditure, operating expenditure

60.

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

61. 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 failured.

Insurance is a specific method used to mitigate risk

62. 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

63. Alternative scenarios are used to _________________________.

a.

Tabulate liquidity gap profilesb. 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

64. 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 programd. Annual reporting on IRRM to shareholders is a crucial aspect of IRRM

65. 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

66. A strong capital budgeting system based on the right ____________________________

mitigates investment risks.a.

Timing of the expenditure

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b. Economic conditions of the country

c. Cost of capital and evaluation techniques

d. Global cues

67. Choose the correct statement from the following statements on compliance risks.

a.

Keeping excellent relations with statutory authorities is the right preventiveaction to manage compliance risks.

b.

Maintaining a clean compliance record is the right preventive action to cope

with compliance risk.

c.

As statutory authorities are not under our control, we cannot take any

preventive action for compliance risks.

d.

As the statutory procedures to be observed are too many and not easy to

understand, we cannot take any preventive action for compliance risks.

68. The in-built risk in foreign exchange dealings is ____________.

a.

Transaction riskb. Credit risk

c. Cross-country risk

d. Sovereign risk

69. 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 riskd. Cross-country risk

70. 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

71. 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

72. 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

73.

Choose the correct one from the following comments on treasury products

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a. Business liabilities cannot be replaced with treasury products but business

assets can.

b. Treasury can use its expertise to replace assets or liabilities with treasury

products to increase returns or lower costs.

c.

Business assets cannot be replaced with treasury products but businessliabilities can

d.

Neither business assets nor liabilities can be replaced with treasury products

74. Treasury products are used by corporates to ______________________________.

a.

Trade in the forex market and make profits

b. Study interest rate fluctuations in the market to make profits

c.

Manage mismatches in liquidity position and to get returns

d. Take care of balance sheet risks

75. Merchant services are ___________________________. (complete the sentence)

a.

Overseas investments, foreign currency loans and hedging of exportreceivables and import payables with the help of banks (FEDAI

dealers)

b.

External commercial borrowings i.e. borrowings in foreign currency

from banks

c. Trading in foreign currency with the help of banks

d. Currency forwards and futures