Progress Test 4 Section P4 E 1

P4: PROGRESS TEST 4 Progress Test 4 A Multiple choice questions (10 questions – approximate time 45 minutes) 1 A non...

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P4: PROGRESS TEST 4

Progress Test 4 A

Multiple choice questions (10 questions – approximate time 45 minutes)

1

A non-interest bearing, unsecured, IOU issued by a company for a minimum of £500,000 is a description of: A B C D

2

3

(2 marks)

Which of the following statements is correct: A

A devaluation of the £ benefits UK exporters because it decreases the value of the £s that they are selling.

B

A devaluation of the £ harms UK exporters because it decreases the value of the £s that they are selling.

C

A devaluation of the £ benefits UK exporters because it decreases the value of the £s that they are buying.

D

A devaluation of the £ harms UK exporters because it decreases the value of the £s that they are buying. (2 marks)

Which of the following is not an advantage of forward contracts? A B C D

4

Commercial paper Bills of exchange Certificate of deposit Treasury bill

Simple, up front costs are either zero or very low Widely available, often offering cover for more than one year ahead Easy to understand and monitor, delivering savings in terms of management time Flexible, so that if the transaction is delayed the forward contract can be delayed (2 marks)

A UK company has just received $100,000; if the exchange rate is 0.5100–0.4900 £ to the $ what sterling revenue will this generate? A B C D

£204,082 £196,078 £49,000 £51,000

(2 marks)

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P4: PROGRESS TEST 4

5

Calculate the cost to a UK company importing from the US and due to pay a $500,000 invoice in three months time, if money market hedging is used. The spot rate is 1.9605– 1.9595 $ to the £ and annual three month interest rates are 5.5%–5.6% in the UK and 5.3–5.4% in the US. The result of a money market hedge will be a cost to stage of: A B C D

6

£251,831 £255,357 £252,607 £251,702

(2 marks)

Using interest rate parity theory, and the data in the previous question, the three month forward rate for the importer will be which of the following: A B C D

1.9590 1.9581 1.9563 1.9600

(2 marks)

Data for questions 7–9 Today is 1 December. Washmore plc is expecting that in two months' time it will have receipts of $4.9m; it has a policy of hedging 100% of its transaction risk in the month it arises. The exchange rates on 1 December are: Spot rate:

$/£ 1.9615

Futures rates: $/£ – contract size £12,500

7

June 1.9502

Identify whether the number, type and date of the contracts needed is: A B C D

8

March 1.9556

200 March contracts to buy 201 June contracts to buy 200 March contracts to sell 201 June contracts to sell

(2 marks)

Assuming that on 1 Feb the spot rate is 1.9600 $/£, calculate whether the likely closing futures price on 1 Feb is: A B C D

1.9630 $/£ 1.9620 $/£ 1.9580 $/£ 1.9570 $/£

(2 marks)

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P4: PROGRESS TEST 4

9

Using your answer from the previous question, calculate whether the profit or loss on the futures contracts is: A B C D

10

Gain £1,786 Loss £1,790 Loss £1,786 Gain £1,790

(2 marks)

Six plc and Nine plc are planning a merger. Shareholders in Nine would accept two shares in Six for every share they hold. The current position is: Six plc 20 million £5m 10

Number of shares Annual earnings P/E ratio

Nine plc 6 million £2.2m 12

As a result of the merger, annual earnings of the enlarged company would be 10% higher than the sum of earnings of each company before the merger. The expected post-merger P/E ratio is 11. By how much would the shareholders in Nine plc gain from the merger? A B C D

£2.97m £3.30m £4.02m £6.27m

(2 marks)

B

Short written questions (3 questions – approximate time 20 minutes)

1

Identify the four main ways of unbundling a division, with a specific motive for each method. (4 marks)

2

Identify the role of the treasury function in each of the key financial strategy policies; investment, financing, dividend and risk management. (6 marks)

3

List four methods of internal currency hedging.

END OF PROGRESS TEST

27

(4 marks)