FM — Financial Management

Section A

NexusDAO is a decentralized autonomous organization transitioning into a formalized corporate structure to attract institutional investors. The founders are concerned about the classic 'agency problem' arising once external shareholders provide capital.

Which of the following mechanisms is MOST likely to align the interests of the new external shareholders with the executive directors of NexusDAO?

Section A

AquaVitae is a global non-governmental organization (NGO) dedicated to providing clean water infrastructure in developing nations.

Unlike a commercial tech startup, which of the following represents the PRIMARY financial objective for AquaVitae?

Section A

VoltGrid PLC, a public utility company, is evaluating the macroeconomic environment. The government has recently announced an expansionary monetary policy, including a significant reduction in the base interest rate.

What is the most likely immediate impact of this policy on VoltGrid PLC?

Section A

EcoBuild, a sustainable construction firm, needs to raise finance. The finance director is considering various instruments available in the money markets and capital markets.

Which TWO of the following are characteristics of the money markets?

Section A

CryptoFlow is a digital asset exchange that needs to manage its fiat currency reserves. It requires $2,000,000 in fiat cash steadily over the next year. The cost of converting digital assets to fiat (transaction cost) is $50 per conversion. The opportunity cost of holding fiat cash is 5% per annum.

Using the Baumol model, what is the optimum amount of fiat cash CryptoFlow should transfer in each transaction? (Round to the nearest whole number).

Section A

CloudSync, a rapidly growing B2B Software-as-a-Service (SaaS) startup, is experiencing cash flow constraints due to long customer payment terms. The finance director is considering either factoring or invoice discounting.

Which of the following is a key difference between factoring and invoice discounting?

Section A

SkyLogistics is evaluating the replacement cycle for its new fleet of electric delivery drones.
Drone Model X costs $12,000.
If replaced after 1 year, the running costs are $2,000 and resale value is $8,000.
If replaced after 2 years, the running costs are $2,000 in year 1 and $3,500 in year 2, with a resale value of $5,000 at the end of year 2.
The company's cost of capital is 10%.

What is the Equivalent Annual Cost (EAC) of replacing the drones every 2 years? (Ignore tax and inflation).

Section A

Oceanic Minerals is considering several deep-sea mining projects but faces strict capital rationing. The company has $10 million available.
Project Alpha requires an initial investment of $4m and has an NPV of $1.2m.
Project Beta requires an initial investment of $6m and has an NPV of $1.5m.
Project Gamma requires an initial investment of $5m and has an NPV of $1.6m.

Assuming the projects are divisible, what is the Profitability Index (PI) of Project Gamma?

Section A

Crescent Real Estate is seeking to raise funds for a new commercial development in a manner compliant with Islamic finance principles. They wish to issue financial instruments that represent an ownership interest in the underlying real estate asset, rather than a debt obligation.

Which Islamic finance instrument is Crescent Real Estate most likely to issue?

Section A

BioGenix, a profitable biotechnology firm, needs to raise $20 million for clinical trials. According to the Pecking Order Theory of capital structure, which source of finance will BioGenix prioritize FIRST?

Section A

AstroTours PLC, a space-tourism company, has just paid a dividend of $0.40 per share. The current share price is $5.20. Historically, dividends have grown at a steady rate of 5% per annum, and this is expected to continue indefinitely.

Using the Dividend Valuation Model (DVM), what is AstroTours' estimated cost of equity?

Section A

PrintConstruct, a 3D-printing construction firm, has unfortunately gone into liquidation. The liquidator is distributing the remaining assets.

Which TWO of the following stakeholder groups rank HIGHER than unsecured trade payables in the statutory hierarchy of liquidation?

Section A

PixelPlay is an unquoted esports franchise generating an annual post-tax profit (earnings) of $2.5 million. A comparable publicly traded esports company, MetaGaming PLC, has a Price/Earnings (P/E) ratio of 14.

Due to PixelPlay being unquoted and less liquid, an acquirer applies a 20% discount to the P/E multiple.

What is the estimated equity value of PixelPlay?

Section A

The current spot exchange rate between the Euro (EUR) and the Brazilian Real (BRL) is EUR 1 = BRL 5.50.
Annual inflation is expected to be 2% in the Eurozone and 8% in Brazil.

According to Purchasing Power Parity (PPP), what is the expected spot rate in one year? (Round to two decimal places).

Section A

TitaniumTech imports rare-earth metals and frequently faces foreign exchange transaction risk. The treasury team is debating whether to use forward exchange contracts or currency options to hedge a large upcoming payment.

Which of the following is a distinct advantage of using a currency option over a forward contract?

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

• Receivables days: 65 days
• Payables days: 40 days
• Inventory days: 55 days

VerdiGrow's main supplier is offering an early settlement discount of 2% if invoices are paid within 10 days, rather than the current 60 days taken by VerdiGrow. Assume a 365-day year.

Question:
What is VerdiGrow's current cash operating cycle?

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

• Receivables days: 65 days
• Payables days: 40 days
• Inventory days: 55 days

VerdiGrow's main supplier is offering an early settlement discount of 2% if invoices are paid within 10 days, rather than the current 60 days taken by VerdiGrow. Assume a 365-day year.

Question:
What is the annualized percentage cost of the early settlement discount offered by the supplier? (Round to one decimal place).

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

• Receivables days: 65 days
• Payables days: 40 days
• Inventory days: 55 days

VerdiGrow is considering implementing a Just-In-Time (JIT) inventory system to reduce its inventory days.

Question:
Which TWO of the following are likely consequences of successfully implementing a JIT system for VerdiGrow?

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

• Receivables days: 65 days
• Payables days: 40 days
• Inventory days: 55 days

Due to a sudden boom in the agri-tech sector, VerdiGrow's sales have doubled in the last six months. However, their cash balance has severely depleted, and they are struggling to pay suppliers on time.

Question:
Which financial phenomenon is VerdiGrow most likely experiencing?

Section B - Case 1: VerdiGrow

Scenario: VerdiGrow is an agricultural technology firm facing cash flow issues due to seasonal demand. The company currently has the following working capital metrics:

• Receivables days: 65 days
• Payables days: 40 days
• Inventory days: 55 days

To resolve its cash flow issues, VerdiGrow decides to finance all of its fluctuating current assets and a portion of its permanent current assets using a short-term bank overdraft.

Question:
What type of working capital financing policy has VerdiGrow adopted?

Section B - Case 2: Solaris Grid

Scenario: Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method.
Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity.
The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%.
The market value of Solaris Grid's debt is $12 million.

Question:
What is the estimated Enterprise Value (total firm value) of Solaris Grid?

Section B - Case 2: Solaris Grid

Scenario: Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method.
Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity.
The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%.
The market value of Solaris Grid's debt is $12 million.

Question:
If the acquirer wanted to calculate the Equity Value of Solaris Grid based on the DCF valuation above, what would it be?

Section B - Case 2: Solaris Grid

Scenario: Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method.
Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity.
The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%.
The market value of Solaris Grid's debt is $12 million.

Question:
If Solaris Grid were a publicly traded company operating in a market that is semi-strong form efficient, how would its share price react to the public announcement of a highly profitable new government contract?

Section B - Case 2: Solaris Grid

Scenario: Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method.
Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity.
The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%.
The market value of Solaris Grid's debt is $12 million.

Question:
Solaris Grid's directors are considering an asset-based valuation approach as an alternative.
Which of the following is a major limitation of using the asset-based valuation method for a company like Solaris Grid?

Section B - Case 2: Solaris Grid

Scenario: Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method.
Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity.
The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%.
The market value of Solaris Grid's debt is $12 million.

Question:
Assume instead that Solaris Grid is already a public company with 10 million shares in issue, currently trading at $3.80 per share. They announce a 1-for-4 rights issue at a discount price of $3.00 per share to raise funds for expansion.

What is the Theoretical Ex-Rights Price (TERP) per share?

Section B - Case 3: GlobalCart

Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.

Question:
The risk that the GBP value of the EUR 500,000 receipt will fall between now and the settlement date in 3 months is known as what type of risk?

Section B - Case 3: GlobalCart

Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.

Question:
GlobalCart decides to hedge the EUR 500,000 receipt using a forward contract.
The current spot rate is EUR/GBP 1.1500 - 1.1540.
The 3-month forward premium is 0.0020 - 0.0015.

What forward rate will the bank offer GlobalCart to sell its Euros?

Section B - Case 3: GlobalCart

Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.

Question:
GlobalCart is considering a money market hedge for the USD 300,000 payment due in 6 months.
Which of the following represents the correct sequence of steps for a money market hedge for a future foreign currency payment?

Section B - Case 3: GlobalCart

Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.

Question:
GlobalCart's finance director is comparing exchange-traded currency futures with over-the-counter (OTC) currency options.
Which TWO of the following statements are correct?

Section B - Case 3: GlobalCart

Scenario: GlobalCart is a UK-based cross-border e-commerce company. Its functional currency is the British Pound (GBP).
GlobalCart imports electronics from the US and exports them to Europe.
The company expects to receive EUR 500,000 in 3 months from European customers.
It also needs to pay USD 300,000 in 6 months to its US suppliers.

Question:
The current spot rate is GBP 1 = USD 1.2500.
The 6-month interest rate in the UK is 4% per annum.
The 6-month interest rate in the US is 6% per annum.

Using Interest Rate Parity (IRP) theory, what is the theoretical 6-month forward rate? (Round to four decimal places).