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FIN3703-25-S2
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QUESTION 16
It is expected that the short-term interest will rise, and you wish to hedge the next rollover of the bankers’ acceptance bill with a forward rate agreement (FRA).
Assume the following applies:
Roll-over :20 April
Spot rate on 20 April :14.5%
FRA spot (Bid/offer) :10.0/11.0%
The cost to the company of the rollover will equal….
- R8 630
- R28 027
- R36 657
- R 44 121
QUESTION 19
It sounds like the newly appointed treasurer reads, understands the company policies, and complies with them in his daily operations
a. False
b. True
Read the following case study and answer questions 12 to 25.
Dalton Ltd:A Giant Leader in the JoJo Tank Market
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Dalton Ltd is the third largest South African manufacturer of high-quality JoJo tanks, with its head offices situated in Midrand. The company owns four branches, one in Naturena, the second in Ennerdale, the third in Pachuca, and the fourth in Roodepoort. Although the market for JoJo tanks has been expanding extremely well, Dalton Ltd could not share in this growth due to the technical problems experienced with the current machine. To increase its production and sales, the company is considering replacing the current injection moulding machine with a more technically advanced model, which will cost the company R3 000 000, which will be raised as a loan from Standard Bank at a fixed interest rate of 11.75% per annum
In financing working capital, the company secured a total revolving credit limit of R170 000 from Capitec Bank at an interest rate of 12.2% per annum.
ADDITIONAL INFORMATION:
Mac Robert, the chief executive officer (CEO) at Dalton Ltd, appointed you (FIN3703 student) at the head office as a treasurer to replace the old injection moulding.
The human resources department provided you with a detailed document that, among other lists the following treasurer performance agreement areas (KPAs):
KEY PERFORMANCE AREA (KPA)
§ Advise on the recruitment of treasury department personnel.
- Ensure the implementation of GAAP.
Provide strategic leadership in the treasury
office of the company.
§ Setting overall strategic organisational goals and objectives.
§
§
§
The chief financial officer (CEO) of the company invited you to a briefing session on the policies of the company and presented you with the following funding and sub-risk management policy documents.
FUNDING POLICY
The funding strategy shall be submitted to board of directors for approval before the commencement of the financial year for which it is applicable and shall be reviewed for amendment should the need arise. The funding strategy shall outline the borrowing requirement for the financial year in question and shall outline the different funding sources the company may utilize to meet its borrowing requirement. The borrowing requirement consists of all short-term and long-term funding needs of the company. The following funding sources are authorized by the board of directors:
MONEY MARKET
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CAPITAL MARKET
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Commercial paper
Bank overdraft
Short-term loan
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Treasury bill
Bank long-term loan
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DALTON’S RISK TREASURY POLICY
There are various risks facing Dalton Ltd on a regular basis that necessitate vigilance and precautionary measures. Some of the risks include liquidity and interest rate risk.
It is the company’s policy that identified risks must be managed within the principles of and risk mitigation strategies laid by the Board of Directors, which are reflected in the risk management policy document. Dalton’s risk management policies consist of the following sub-risk policies
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CASH AND LIQUIDITY RISK MANAGEMENT POLICY
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The cash and liquidity risk management policy aims to define the mechanisms of how cash will be managed within the company to mitigate risk. Forecasting tools are used to create a cash surplus/requirement ladder, which is then utilized for investment/funding purposes, respectively.
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CREDIT RISK MANAGEMENT POLICY
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Counterparty credit risk is the risk that the company may incur when dealing with counterparties who may not be able to meet all or a portion of their commitments within a certain time, credit limits and the utilization thereof are confidential. It is the company policy that the criteria used to determine the credit limits shall not be revealed to any counterparty under any circumstances. Recognized credit rating agencies, where possible, may be utilized in the credit evaluation process is critical. There shall be continuous and constant monitoring of the credit quality of counterparties, and any defaults will be written off as bad debts. Credit limits must be formally reviewed at least annually, including the risk of default.
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INVESTMENT RISK MANAGEMENT POLICY
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The investment of funds must be carried out and be deposited with the authorized counterparty, and the company must ensure that the financial institution is financially sound in reducing risk. To determine the financial soundness and creditworthiness of the investment managers with which the company does business, a credit model of the counterparty concerned must be crafted
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INTEREST RATE RISK MANAGEMENT POLICY
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Interest rate risk shall be managed using suitable hedging instruments such as financial derivatives, taking due cognisance of interest exposure and corresponding liquidity risk. The decision whether to use fixed and/or floating interest rates shall be determined by the duly authorized official, having regard to the sensitivity and term of the underlying assets and liabilities, and the nature of the interest rate environment.
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This is what you find in the company’s treasury department:
Mr Sibusiso Bengu, the most experienced personnel at the Roodepoort branch, who have 10 years good relationship with Standard bank manager has the responsibilities to ensure that every time the Standard bank branch account reaches R450 000, the amount by which the account exceeds R200 000 (that is R250 000) is transferred to the head office account.
REQUIRED:
After reviewing and analysing the case study of Dalton Ltd thoroughly, answer questions 12 to 19.
QUESTION 12
The treasurer must develop a cash flow statement to determine how much Dalton Ltd needs each day to fund the business operations.
a. True
b. False
QUESTION 13
The ability for Dalton's to replace its defective injection moulding can be referred to as liquidity.
a. True
B. False
QUESTION 11 Which one of the following statements is correct?
a. The accounting net income is more useful to the financial manager.
b. The cash flow statement is more useful to the accountant.
c. The cash flow statement is more useful to the financial manager.
d. None of the above is correct
FOR QUESTIONS 9 TO 11, REFER TO THE FOLLOWING INFORMATION:
Van Schaik Bookstore supplies textbooks to college and university bookstores. The books are supplied with a provision that they must be paid for within 30 days. In 2023, Van Schaik bookstore supplied and billed books totalling R760 000. Collections, net of return credits, during the year totalled R690 000. The company spent R300 000 acquiring the books that it supplied.
QUESTION 9
Using the accrual accounting value (accrual principles), the company’s net profit for the past year equals... .
a. R390 000
b. R460 000
c. R480 000
d. R490 000
QUESTION 10
Using cash accounting value (cash principal principle), the company’s net cash flow for the past year is equal to … .
a. R390 000
b. R460 000
c. R480 000
d. R490 000
FOR QUESTIONS 7, REFER TO THE FOLLOWING INFORMATION:
You have been presented with the following information about Reserve Bank Debenture (RBD) that has been issued by the South African Reserve Bank (SARB) to ABSA Bank:
Amount invested/nominal value = R10 million
Issue date = 23 October 2024
Maturity date = 21 November 2024
Days = 30 days
Interest = 8.6 p.a.
(Note: Use 365 days.)
QUESTION 7
The South African Reserve Bank must therefore pay ABSA Bank at the end of the period an amount of … plus interest of … .
- R10 million: R70 680
- R10 million: R78. 897
- R10 million: R81 876
- R10 million:R85 785
FOR QUESTIONS 3 AND 4, REFER TO THE FOLLOWING INFORMATION:
You have been presented with the following information about Treasury Bills (TBs) that are trading in the secondary market:
Bid/offer = 8.71/8.40%
Face value = R100 000
Days to maturity = 35
(Note: Use 365 days.)
QUESTION 3 )
Which of the following statements are correct?
a. The price maker is prepared to buy TBs at 8.40%.
b. The price maker is prepared to buy TBs at 8.71%.
c. The above offer would translate into a price of R99 164.80.
d. The above bid would translate into a price of R99 164.80.
1. a and b
2. b and c
3. c and d
4. b and d
QUESTION 6
Which of the following statements correctly describes the forward contracts?
a. They are tailor-made instruments that are traded over the formal exchange.
b. They are standardised financial instruments that have a low credit risk and are easy for the parties involved to get out of the contract once it has been established.
c. Because of their nature, it can be concluded that they are liquid and have very low credit risk.
d. Because they are tailor-made, it is difficult to get out of once they have been established.