​​​ Question 1 A company can obtain its necessary financial resources from debt or equity. (a) Explain where these sources could come from, and how the company could access them. (4 marks) (b) Analyse the pros and cons of each of these sources. (6 marks) Question 2 (a) Appraise the advantages and disadvantages for an investor to invest his money through a mutual fund compared to investing the money on his own. (6 marks) (b) Go to the dollarDEX website and pick a fund managed by LionGlobal. Assess the merits of an investment in the fund you have chosen for an investor who is retiring in one years' time. (9 marks) Question 3 1 October 2007 - Golden Circuit Ltd, a Singaporean company which you just joined as treasurer, needs to borrow SGD 10 million (mln) for 5 years. You contact a local bank and get the following 3 offers of loans: 1. 10 mln SGD 5 years fixed rate at 5% 2. 10 mln SGD 3 years fixed rate at 4% 3. 10 mln SGD 5 years floating rate loan at LIBOR 1-year + 200 bp (basis points). The 1-year LIBOR rate on the day (1 October 2007) is 1.75%. (a) Describe the risks (or lack thereof) associated with each type of loan in terms of interest rate risk and funds availability. (4 marks) (b) Quantify - whenever possible for the 3 options - the amount of interests that the firm will have to pay from year 1 to year 5 respectively. Present the results in table form. (4 marks) You have finally opted for choice #1. One year after you contracted the loan, however, the world is hit by the worst financial crisis since the great depression and central banks worldwide respond in an almost unanimous way by slashing interest rate to a near zero level to spur back growth. FIN301e Copyright © 2016 SIM University Page 7 of 9 ECA – January Semester 2016 (c) Describe and explain the traditional central banks actions when it comes to monetary policy, and how they have reacted to the global financial crisis. (4 marks) (d) Recollecting your memories of courses on financial instruments (and in particular the chapter on interest rate swaps), how will you react to this new environment as far as the loan that you took is concerned? Explain your decision and describe how it would be implemented and then how it would work. (8 marks) Question 4 Kevin Gmbh, a company based in Germany, has received today, 7 June 2014, an order to sell 12,000 tons of fertilizer to a client based in Chicago, USA. Kevin's production cost is 280 Euro per ton of fertilizer, and it usually makes a 25% gross margin on its sale. The invoice to the client needs to be issued today, but will be payable on 7 November 2014. Moreover, although Kevin's base currency is Euro (EUR), the client only pays in US Dollars (USD) and wants to be invoiced in this currency. While today 1 EUR = 1.35 USD, Kevin's treasurer knows that by the time he is paid by his American client, the EUR/USD rate could be very different, either up or down from the current level, exposing him to a potential foreign exchange loss. Therefore, he thinks that a hedge is necessary, but is hesitating between a forward contract, a currency futures contract, and an option. The prices of the currency futures contracts could easily be found on Bloomberg. On the other hand, Kevin's home bank, Commerzbank, has offered the following quotes, and has the necessary internal authorizations to trade with Kevin Gmbh.