Podcast
Questions and Answers
Which THREE of the following are reasons for holding cash?
Which THREE of the following are reasons for holding cash?
Which action would be most appropriate to utilize a short-term surplus in cash budget?
Which action would be most appropriate to utilize a short-term surplus in cash budget?
According to the Baumol Model, what is the optimum amount of short-term investments to convert into cash in each transaction if a company needs $150,000 annually?
According to the Baumol Model, what is the optimum amount of short-term investments to convert into cash in each transaction if a company needs $150,000 annually?
When a company’s transaction costs of converting investments to cash decrease and the interest rate increases, what should happen to the optimal cash holding?
When a company’s transaction costs of converting investments to cash decrease and the interest rate increases, what should happen to the optimal cash holding?
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In the Miller-Orr model, when the cash balance rises above the upper limit, what action is taken?
In the Miller-Orr model, when the cash balance rises above the upper limit, what action is taken?
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What level of cash receipts should be recorded in the cash budget for March 20X2 given the sales forecast and payment patterns?
What level of cash receipts should be recorded in the cash budget for March 20X2 given the sales forecast and payment patterns?
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Which THREE of the following items should be included in a cash flow forecast?
Which THREE of the following items should be included in a cash flow forecast?
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What should happen when the cash balance falls to the lowest limit in the Miller-Orr model?
What should happen when the cash balance falls to the lowest limit in the Miller-Orr model?
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Which statement accurately reflects the characteristics of convertible secured loan notes compared to ordinary secured loan notes?
Which statement accurately reflects the characteristics of convertible secured loan notes compared to ordinary secured loan notes?
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What type of capital do preference shares represent, and what is their risk level compared to ordinary shares?
What type of capital do preference shares represent, and what is their risk level compared to ordinary shares?
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Calculate the theoretical ex-rights price per share if the EPS is currently $0.50 and the shares are trading on a price/earnings ratio of 20 times.
Calculate the theoretical ex-rights price per share if the EPS is currently $0.50 and the shares are trading on a price/earnings ratio of 20 times.
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What does a rights issue typically provide to existing shareholders?
What does a rights issue typically provide to existing shareholders?
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In regards to Islamic finance, what accurately reflects the murabaha and mudaraba structures?
In regards to Islamic finance, what accurately reflects the murabaha and mudaraba structures?
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What is the theoretical value of a right per existing share for a company with $5m of $0.50 nominal value ordinary shares, if the rights issue is at $6 per share?
What is the theoretical value of a right per existing share for a company with $5m of $0.50 nominal value ordinary shares, if the rights issue is at $6 per share?
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Which statement generally describes a sukuk?
Which statement generally describes a sukuk?
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When considering the benefits of a flexible repayment schedule, which of the following is a potential drawback with traditional loan structures?
When considering the benefits of a flexible repayment schedule, which of the following is a potential drawback with traditional loan structures?
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What is the primary characteristic of a bond in Islamic finance?
What is the primary characteristic of a bond in Islamic finance?
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Which of the following is considered a funding gap for small and medium-sized enterprises (SMEs)?
Which of the following is considered a funding gap for small and medium-sized enterprises (SMEs)?
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Which option describes the concept of 'venture capital' in the context of SMEs?
Which option describes the concept of 'venture capital' in the context of SMEs?
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What is the common reason SMEs have restricted access to capital markets?
What is the common reason SMEs have restricted access to capital markets?
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When private individuals invest directly into a small business, what is this process called?
When private individuals invest directly into a small business, what is this process called?
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Which statement accurately reflects the challenges faced by SMEs in relation to funding?
Which statement accurately reflects the challenges faced by SMEs in relation to funding?
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Which of the following statements about SMEs is true?
Which of the following statements about SMEs is true?
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What is a common misconception about funding for SMEs?
What is a common misconception about funding for SMEs?
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What is the suitable risk-adjusted cost of equity for the new project calculated using the capital asset pricing model?
What is the suitable risk-adjusted cost of equity for the new project calculated using the capital asset pricing model?
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What is the net asset value per share of QK Co on a historic basis?
What is the net asset value per share of QK Co on a historic basis?
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What is the total net realizable value for the assets of the private company?
What is the total net realizable value for the assets of the private company?
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In which situation is asset-based business valuation using net realizable values most useful?
In which situation is asset-based business valuation using net realizable values most useful?
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Which definition best describes replacement value of a business?
Which definition best describes replacement value of a business?
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What is the debt to equity ratio (debt/debt + equity) given the average debt of 25%?
What is the debt to equity ratio (debt/debt + equity) given the average debt of 25%?
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How is the capital asset pricing model primarily used in finance?
How is the capital asset pricing model primarily used in finance?
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What factor is NOT considered in calculating the minimum price per share for the private company?
What factor is NOT considered in calculating the minimum price per share for the private company?
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What is the expected six-month forward exchange rate according to interest rate parity?
What is the expected six-month forward exchange rate according to interest rate parity?
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What type of risk is primarily faced by Herd Co regarding its euro receipt?
What type of risk is primarily faced by Herd Co regarding its euro receipt?
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Which hedging method is NOT suitable for Herd Co to hedge its euro receipt?
Which hedging method is NOT suitable for Herd Co to hedge its euro receipt?
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What statement supports the finance director's belief that the euro will depreciate against the dollar?
What statement supports the finance director's belief that the euro will depreciate against the dollar?
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Which statement is correct regarding the interest rate risk faced by Herd Co?
Which statement is correct regarding the interest rate risk faced by Herd Co?
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If Herd Co believes interest rates will rise, what action might they consider to mitigate risk?
If Herd Co believes interest rates will rise, what action might they consider to mitigate risk?
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Which factor is least likely to influence Herd Co's decision to hedge its foreign receipt?
Which factor is least likely to influence Herd Co's decision to hedge its foreign receipt?
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What describes the relationship between LIBOR and the variable interest paid on Herd Co's loan notes?
What describes the relationship between LIBOR and the variable interest paid on Herd Co's loan notes?
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Study Notes
Cash Management and Business Finance
- Holding cash is essential for businesses to meet immediate needs despite investing it for returns.
- Reasons for holding cash include:
- Movement motive: Cash to manage fluctuations in cash flow.
- Transactions motive: Cash needed for day-to-day operations and expenditures.
- Precautionary motive: Cash reserve to cover unforeseen expenses.
Thrifty Pic’s Cash Budget
- A projected short-term cash surplus can be utilized effectively through:
- Paying suppliers earlier for discounts.
- Investing in long-term deposit accounts for better returns.
Baumol Model Calculations
- A company requiring $150,000 annually, incurs $400 transaction costs converting investments to cash, with interest rates of 5% on investments and 1% on cash.
- Optimal amount to convert per transaction is determined to manage costs and maximize returns.
Miller-Orr Model Application
- TB Co's treasury management identifies:
- A minimum cash balance of $1 million and maximum of $10 million.
- Actions when reaching these thresholds include transferring excess cash into securities and selling portions when falling below lower limits.
- Variance in daily cash flows affects the cash balance limits.
Sales Receipts Calculation
- JP Co’s sales in January, February, March, and April span over $300,100 to $320,500, with half being credit sales.
- An estimated percentage of receivables can result in significant early settlement discounts, affecting cash budget totals in March.
Cash Flow Forecasting Essentials
- Key items to consider include:
- Flexible repayment schedules.
- Charges only for drawn amounts.
- Consideration of lower interest rates for budgeting.
Convertible Secured Loan Notes
- Generally more expensive to service due to their equity aspect, contrasting with ordinary secured notes.
Preference Shares
- Represent equity capital, carrying lower risk than ordinary shares.
Rights Issue Pricing
- A 1 for 4 rights issue and current EPS of $0.50 with a market cap of $50 million lead to discernible changes in share price and theoretical ex-rights price.
Islamic Finance Options
- Tulip Co's financing needs can be met through:
- Murabaha: Financing product in Islamic finance for asset purchase.
- Mudaraba: Partnership between an investing and working partner.
Sukuk Characteristics
- Defined as a bond in Islamic finance where the lender possesses the asset and shares associated risks.
SMEs and Funding Challenges
- Young SMEs face barriers in accessing finance, illustrated by:
- High perceived risk by lenders.
- Lack of detailed financial reports.
- Inability to privately place shares.
Funding Gap in SMEs
- Defined as the difference between required and available capital, evidenced by higher perceived risks compared to larger entities.
Business Valuation Strategies
- Different assessment methods, including asset-based valuation for strategic acquisitions and the replacement value reflecting necessary cost structures.
Interest Rate Risk Management
- Companies like Herd Co manage risks tied to currency depreciation and rising interest rates through various hedging techniques and understanding market dynamics.
Forward Exchange Rates and Risk Classification
- Predictive measures for forward exchange rates utilizing interest rate parity indicate economic conditions affecting transaction risks for international receipts.
Interest Rate Risk Hedging
- Options such as interest rate futures and options provide means to mitigate potential risks associated with variable rate loans, lending strategic foresight to treasury management.
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Description
This quiz covers essential reasons for holding cash in a business context, including movement, transactions, and precautionary motives. Additionally, it explores appropriate actions to take when a company has a short-term cash surplus. Test your knowledge on effective cash management strategies.
