Sunday

Question 1

List methods of internal controls

SOAPSPAM

Answer 1

1. Segregation of control
2. Organisational control
3. Authorisation
4. Personnel controls
5. Supervision
6. Physical controls
7. Arithmetical controls
8. Management

Question 2

Types of Equity financing

Answer 2

Make a point that available options are governed by the tessland stock exchange. Our low beta (0.91) suggests that our shareholders may be risk averse.

Equity is less risky for Roboryce as no loan repayments but would be more risky for shareholders so the cost of equity may be higher

Types
Rights Issue
- Offered to existing shareholders at market value with the right to buy a proportional amount of shares so no dilution of power

Placement
- Shares placed with a major investor if they can be found, which could be difficult. Saves any costs associated with a rights issue.

Retained equity
- Could forgo the usual dividend to raise finance which may make investors unhappy. Benefit is no issuing costs
- Could use reserves to fund the investment which would send a positive signal to the market (signalling effect) and boost share price. Could be better uses for funds

Question 3

Types of Debt financing

Answer 3

Term Loans (Bank Loans)
- Borrow money in exchange for interest payments and pay capital at the end
- Advantage - flexible in terms of amount, length, interest rates, securities
- Disadvantage - gearing relatively high, may have covenants (link in interest cover)

Debentures (Bonds)
- A form of IOU thats issued to the market
- Receive periodic interest and future repayment

Different types
Deep discount and zero rate
- Pay little to no interest but redeem at a premium

Convertible
- Gives the right ot convert the debt into equity shares at maturity
This provides upside risk for the holder so they may buy at a premium

Question 4

Benefits of internal audit and three audits they could be involved in

Answer 4

Benefits of including internal audit in due diligence/appraisals
* Identifying and managing risks is part of their role
* Ensures robust processes (like due diligence) have been followed properly
* Impartial recommendation

Three audits IA could be involved in
* Operational audit
* Supplier audit
* IT audit

Question 5

Options for Hedging Currencies

Answer 5

Forward Contract
* Fixed commitment between two parties to buy/sell at a fixed rate in the future
* Adv. simple with no up front transaction costs
* Disadv. Cannot be amended so may carry downside risk

Money market hedge
* Uses the relationship between interest rates and exchange rates to manufacture a forward rate
* Involves taking a loan on the value of a future invoice or payment, exchanging it and growing the currency using the interest rate
* Adv. creates certainty over the cost and value of future transactions and can be reversed
* Disadv. Fixed so no upside risk

Currency future
* A currency future is a standardised contract to buy or sell a fixed amount of currency at a fixed exchange rate at a fixed future date, and it is achieved by entering into a futures contract that is completely separate from the underlying transaction.
* Any loss on the spot market should result in an equivalent gain in the futures market and vice versa
* Adv. futures contract can be ended at any point before the settlement date, which is useful is the date of the underlying transaction changes
* Disadv. Cannot be tailored to transaction requirements

Currency options
* Similar to other futures contracts, however, it gives the bearer the option to redeem not the obligation.
* Adv. protects the owner from downside risk as they can just not redeem
* Disadv. Premium is required to secure
* Answer should include a description of the technique, simple illustration and advantages/disadvantages