CFC Treasury Management & Cash Flow 4 — Questions and Answers
Question 1: A treasurer is applying the Baumol-Allais-Tobin (BAT) model to optimize cash balances. What trade-off does the model balance?
- Foreign exchange risk versus interest rate risk
- Transaction costs of converting securities versus opportunity cost of holding idle cash (Correct answer)
- Short-term borrowing costs versus long-term debt issuance fees
- Credit risk versus liquidity risk in money market funds
Correct answer: Transaction costs of converting securities versus opportunity cost of holding idle cash
The BAT model minimizes total cost by balancing transaction costs (converting investments to cash) against the opportunity cost of excess cash.
Question 2: A company enters a cross-currency basis swap to convert USD floating-rate liabilities into EUR floating-rate liabilities. What primary risk does this hedge?
- Commodity price risk
- Currency translation risk on EUR-denominated revenues
- Interest rate basis risk only
- Both currency and interest rate risk simultaneously (Correct answer)
Correct answer: Both currency and interest rate risk simultaneously
A cross-currency swap exchanges both principal and interest in different currencies, hedging both FX exposure and interest rate mismatches.
Question 3: Which benchmark is most commonly used for US dollar overnight lending between banks under the post-LIBOR reform environment?
- EURIBOR
- SOFR (Secured Overnight Financing Rate) (Correct answer)
- SONIA
- ESTR
Correct answer: SOFR (Secured Overnight Financing Rate)
SOFR replaced USD LIBOR as the preferred US dollar overnight benchmark rate following the LIBOR phase-out.
Question 4: A company's operating cash flow is $8M, capital expenditures are $3M, and it pays $1M in dividends. What is its free cash flow to equity (FCFE)?
- $4M (Correct answer)
- $5M
- $8M
- $11M
Correct answer: $4M
FCFE = Operating CF − CapEx − Dividends = $8M − $3M − $1M = $4M available to equity holders.
Question 5: What is the key distinction between a revolving credit facility and a term loan from a treasury liquidity perspective?
- A revolving facility allows repeated drawdowns up to a limit; a term loan disburses once and amortizes (Correct answer)
- A term loan has no maturity date; a revolving facility must be repaid within 12 months
- Revolving facilities are always unsecured; term loans require collateral
- Term loans carry floating rates; revolving facilities always carry fixed rates
Correct answer: A revolving facility allows repeated drawdowns up to a limit; a term loan disburses once and amortizes
A revolver provides flexible, repeatable access to credit up to a committed limit, whereas a term loan is a one-time disbursement that amortizes over time.
Question 6: A company's accounts payable days (DPO) are 40, inventory days (DIO) are 60, and DSO is 50. What is the cash conversion cycle?
- 150 days
- 70 days (Correct answer)
- 110 days
- 30 days
Correct answer: 70 days
CCC = DSO + DIO − DPO = 50 + 60 − 40 = 70 days.
Question 7: Under FASB ASC 815, a treasury team designates a currency forward as a cash flow hedge of a forecasted export sale. Where is the effective portion of the gain or loss initially recorded?
- Immediately in net income
- In other comprehensive income (OCI) (Correct answer)
- As a deferred tax asset on the balance sheet
- As a reduction to revenue
Correct answer: In other comprehensive income (OCI)
For a qualifying cash flow hedge, the effective portion of the derivative's gain or loss is deferred in OCI until the hedged transaction affects earnings.
CFC Treasury Management & Cash Flow 4
A treasurer is applying the Baumol-Allais-Tobin (BAT) model to optimize cash balances.
What trade-off does the model balance?