المحاسب الإداري المعتمد الجزء 2 B. Corporate Finance

Ondara: Investing a Customer Advance Until a Supplier Milestone

Ondara Water Technologies

Question of 6 Ondara: Investing a Customer Advance Until a Supplier Milestone

Ondara: Investing a Customer Advance Until a Supplier Milestone Case-based question

الحالة

Ondara Water Technologies builds membrane filtration units for municipal water plants. On April 1, 20X6, a city utility paid Ondara a $4,800,000 advance under a fixed-price contract. Ondara owes exactly that amount to its membrane supplier on July 1, 20X6, 91 days later, when a contractual production milestone falls due. If production runs ahead of schedule, the supplier may invoice up to $1,200,000 of that amount as much as 30 days early; the balance is always due on July 1. Until it is paid, the cash is not needed in operations.

Ondara's finance committee has set three rules for investing this money:

Principal safety. A candidate qualifies only if (a) it matures on or before July 1, so that its value on that date does not depend on a market price, and (b) its credit exposure is to the national government or to bank deposits covered in full by the deposit-protection scheme described below.
Liquidity reserve. At least $1,200,000 must be held in a qualifying instrument that has an active secondary market, so that it could be sold within one business day at close to its accrued value if the supplier invoices part of the milestone early.
Return. Subject to rules 1 and 2, maximize the annualized return after fees and income tax.

The treasurer has gathered these candidates:

Candidate	Maturity	Quoted annual rate	Credit support	Secondary market	Costs
Government Treasury bills	91 days (July 1)	4.25%	National government	Active dealer market; can be sold the same day	None
Negotiable CDs from Ondara's seven relationship banks	91 days (July 1)	4.60% at every bank	Deposit protection up to $300,000 per depositor per bank, covering principal and accrued interest combined	Transferable, but the dealer market is thin; an early sale could take several days and require a price concession	Broker placement fee of 0.20% per annum on principal, paid at maturity
Commercial paper of a highly rated equipment manufacturer	91 days (July 1)	5.05%	Unsecured; no guarantee or protection	The issuer's dealer may repurchase it at a negotiated price	None
Government bonds	8 years	4.70%	National government	Active dealer market	None
Perpetual preferred shares of a listed telecommunications company	None	6.30% indicated dividend yield	Dividends are paid only when declared	Listed; trades daily	Brokerage of 0.10% of value on each purchase and each sale

The treasurer proposes placing $296,000 of principal with each of the seven banks and investing the rest of the advance in Treasury bills.

الافتراضات

All quoted rates are annualized simple rates on an actual/365-day basis, paid at maturity. Qualifying instruments are held to maturity unless the supplier invoices part of the milestone early.
Ondara pays income tax at 23% on all interest income, and the CD placement fee is tax-deductible. Treat tax effects as arising in the same period as the related income or fee. These tax treatments and the deposit-protection scheme are case facts, not statements about any jurisdiction's law.
Ondara holds no other deposits with any of the seven banks. Treat Treasury bills, and bank deposits within the protection limit, as free of default risk.
The CDs' after-fee rate is the quoted rate minus the placement fee rate. Ignore compounding, reinvestment and the timing of tax payments.

The perpetual preferred shares offer the highest quoted return of all five candidates, and they trade daily. Which statement best explains why they still fail Ondara's principal-safety rule?

الإجابة Because the shares trade daily, Ondara could sell them on July 1 for about what it paid, so they pass the maturity test; their one weakness is that dividends are not guaranteed. Because the shares never mature, Ondara would have to sell them by July 1 at whatever the market price is then, so it could get back less than it invested. The 0.10% brokerage charged on the purchase and again on the sale means Ondara is certain to get back less than it invested, whatever happens to the share price. Ondara could keep the shares after July 1 until their price recovers, so a price fall need never become a loss; they fail only because the committee prefers instruments with a stated maturity.

Select the THREE statements that correctly apply Ondara's policy to the candidates and to the treasurer's proposal.

اختيار 3 إجابات. المحدد 0 / 3

الإجابة The 8-year government bonds satisfy the principal-safety rule because the national government issues them. Placing $296,000 with each bank keeps principal plus 91 days of interest within the $300,000 protection limit at every bank. The negotiable CDs could hold the $1,200,000 liquidity reserve, because a CD that can be transferred to another holder can always be sold within one business day at close to its accrued value. The Treasury bills are the only candidate that meets both the principal-safety rule and the active-market condition of the liquidity reserve. Placing $300,000 of principal with each bank would be fully protected, because the protection limit applies to principal only. The commercial paper matures on July 1 but still fails the policy, because its credit exposure is neither to the national government nor deposit-protected.

Under the treasurer's proposal, what is the total interest to July 1 on the combined CD principal at all seven banks, before the broker's placement fee and before income tax? Calculate it in one step on the combined principal, using actual/365 simple interest, and round only the final result. Enter a positive amount in US dollars rounded to two decimal places (the nearest cent).

الإجابة USD

بـ 2 منازل عشرية.

What is Ondara's annualized yield on the CDs after the placement fee and income tax? Enter the yield in percentage points, rounded to two decimal places (for example, enter 1.23 for 1.23%).

الإجابة percent

بـ 2 منازل عشرية.

If the supplier invoices the full $1,200,000 early, Ondara should raise that cash by selling Holding to sell , because Reason . Keeping the CDs for the rest of the period is still worthwhile: after the placement fee and income tax they earn CDs' after-cost advantage a year more than the Treasury bills, an advantage that would disappear only if the placement fee rose to Break-even placement fee a year. Figures in the options are rounded to two decimal places.

For its minutes, the committee ranks every candidate with a three-step ladder. (1) Candidates that meet the principal-safety rule rank above all others; among them, the higher annualized return after fees and income tax ranks higher. (2) Among candidates that fail the principal-safety rule, those that mature on or before July 1 rank above those that would have to be sold at a market price. (3) Among candidates that would have to be sold at a market price, national-government credit ranks above other credit. Treat the CDs as the treasurer's $296,000-per-bank placement. Arrange the five candidates from highest-ranked to lowest-ranked.

إعادة الترتيب بالسحب أو بأزرار الأسهم.

Government bonds (8 years)
Negotiable CDs ($296,000 at each of seven banks)
Perpetual preferred shares
Government Treasury bills
Commercial paper

جارٍ الحفظ…

تظهر الدرجات والإجابات الصحيحة والشروح فور تسليم الإجابات. ولا يحصل السؤال غير المُجاب على أي درجة.

جارٍ الفحص…

حالات تدريبية أصلية من إعداد صرح. ليست أسئلة من امتحانات IMA، ويخضع تصحيحها لسياسة صرح الخاصة، وهي تختلف عن سياسة الامتحان الرسمي.