Treasury, Risk and Financial Management

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PART ONE
Total word count: 1200 words No. of References: 10
Question 1:
There are a number of theories regarding the relevance of corporate capital structure in respect to determining corporate value – discuss these theories. In what situations might management decide to increase debt in the capital structure?
Question 2:
Shares in New Corp sell today at $50 per share. It is expected that the end of year dividend will be $2.50 per share. If the expected end of year share price is $58.50 calculate; a. the dividend yield,
b. total rate of return,
c. return from capital gains.
Explain the results in light of two dividend pay-out policy theories.
Carry out the same calculations given an end of year share price of $45.00 and again explain the results.
Question 3:
How does the price of a put option respond to the following changes? Indicate whether or not the price will go up or down and briefly explain your answer.
(a) Stock price increases,
(b) Exercise price is increased,
(c) Expiration date of the option is extended,
(d) Volatility of the stock price falls,
(e) The risk free interest rate rises.
PART TWO
This is designed to test students on International Monetary System and Currency Risk Management.
On International Monetary System, students are expected to research on a particular country’s unregulated financial system and the possible impact on the international financial landscape. The emphasis is on presenting the relevant arguments on the potency of an impending crisis if regulation is not imposed.
On Currency Risk Management, students are expected to devise a currency hedging strategy for a particular firm using derivatives. The emphasis is on quantitative skills and the mechanics of the different contracts.
Question 1:
Define China’s shadow banking system and the threats it poses to China’s domestic economy. Also present arguments why this may or may not trigger a worldwide crisis.
Total word count: 1000 words No. of References: 10
Question 2:
Ace plc produces drill bits for gold mining equipment. A German customer is contracted to pay Ace plc 8.5 million euros in six months’ time. The top management of the company is thinking whether or not to hedge this foreign currency receipt, and if so, which method would be optimal. Some executives believe the exchange rate will be GBP1= EUR 1.37 when payment is due from the customer. Other executives think the exchange rate will be GBP1= EUR 1.43. The alternatives available to Ace plc are as follows:
i) Forward contract hedge: Spot GBP/EUR Bid 1.4010 – Offer 1.4132
6 month forward points: 95/85
ii) Currency option hedge
Call option available: Strike GBP/EUR 1.4200 at premium GBP 1.20 per EUR100
Put option available: Strike GBP/EUR 1.4180 at premium GBP 1.00 per EUR100
iii) Money market hedge
Europe interest rate
Bid 2.75%
Offer 3.00%
US interest rate
Bid 6.20%
Offer 6.60%
The bank charges an administrative fee of 0.5% on the final receipt.
iv) To do nothing.
Required:
(a) Calculate the net receipt in GBP under each of the four alternatives assuming the exchange rate in six months are:
i. GBP1= EUR 1.37
ii. GBP1= EUR 1.43
(b) Based on your answer in part a above, make a reasoned recommendation on which
alternative is optimal.
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