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1st assignment due prior midsem. number of long response question...

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Question 1: Briefly describe the challenge that Martina Hund-Mejean faced after joining Tyco Incorporation as a treasurer. Martina Hund-Mejean was appointed to be the new treasurer during crisis. Her main challenge is to manage liquidity (getting access to cash and refinancing debt), this challenge is contributed by various factors -

because of the scandal, the company stock value was decreased by more than twothird of its value, and the company incurred negative publicity . This lead to difficulties in borrow fund because cost of fund would be higher since the company is associated with many risks, and as lenders are concerned about the firm’s solvency, limited access to funding.

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Overhang debt means there is a burgen of existing debt matures by 2003. More than 50% of this debt value mature in 1st quarter. given such a short-term timeline means the company have issue in tracking its debt maturity. Martina faced challenges of refinancing debts and managing debt maturity timeline. This further lead to the firm being downgraded by credit agency.

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Cash and short-term investment was locked up in myriad subsidiaries scattered around its geography cover, in which making it became inaccessible and illiquid for treasurer to meet its liquidity demand and repay previous loan.

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the company belief in its acquisation strategy was diversified and the fact that it is one of the largest conglomerate have make them become a disadvantages for Martina. As she had to satisfy all related stakeholder of the firm.

Question 2: Briefly describe the strategic reform that Martina Hund-Mejean initiated to manage the Tyco Incorporation's liquidity position. After Issuing convertible debt at a very high-risk premium to get over the refinancing requirement, Hund-Mejean proposed to Restructure the treasury system to centralised treasury management as a strategic reform. Treasury department would have greater visibility and control of liquidity. supporting the company funding decision, investment, forecast and debt repayment. This would help them to better minimise its reliance on external funding, tracking their debt repayment CF and Reducing free cash holdings and increasing profitability. Question 3: Before Martina Hund-Mejean joined Tyco international, its treasury management system (TMS) was decentralized. After joining Tyco, Martina took the initiative to make the TMS of Tyco centralized. Briefly discuss the difference between centralized and decentralized treasury management to explain why Martina preferred centralized TMS? -

Decentralized Treasury Management: Treasury duties conducted at the local level in very unit, which each unit has its banking account, investment decision, guideline

and procedure. the benefits fo For relative small firm, this would increased flexibility and speed of operations. Control, economies of scale, but lack of synergy could contribute to increased costs, potential losses, and larger degrees of exposure and risk to the firm’s financial. -

Centralized Treasury Management is when Group Treasury undertakes all treasury activities. it aims to having uniform systems and processes to support various entities at one location, with a rationed set of service providers, minimal bank accounts, and consistent service levels. In Tyco case, there are three layers: Parent (Bermuda), Intermediate Holding Company (Europe), and the Operating Company (subsidiaries around the world), in which Europe is chosen to leverage the structure for Treasury operations by concentrating cash from across all the global subsidiaries in various currencies at Europe. Martina and the Treasury can Better visibility and more control over liquidity that leads to improved investment and funding decisions, better forecasting, and faster repayment. Especially she can develop and banking relationship network under one unit. Recall one of the challenges she faced is due to the company’s size and its role as a conglogermate, its asset is scattered around its geography cover, having a centralized system could resolve the problem of her access to funding more efficient.

Question 4: Let assume, you are a treasurer of an international organization. One of your primary responsibilities is to manage the liquidity risk of the firm. How will you manage the potential short-term liquidity requirements of your firm? -

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Potential short term liquidity requirement is to meet the debt payment demand, improve company stock value or investment decision. My role as a treasurer is to monitor cash cycle, the shorter the cash cycle the higher ROA. Short term financing short I would consider using include i) Trade credit from supplier: Trade credit is the loan extended by one to another when the goods and services are bought on credit. This would help the company to receive good/service from suppliers without immediate payment, which lengthen maturity ii) Overdraft allows the business to spend more money than is deposited in the bank account. A bank can impose a limit for an overdraft account, the company can withdraw at anytime Interest cost are varied across bank and security maybe required if the company have bad reputation iii) Shortterm loan is another option for the company to borrow money with specific term and maturity that can be negotiated between the bank and the company, a stronger the bank relationship, the better the term

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Short term loan and trade credit from supplier would be chosen because with these two, both can lengthen the maturity of liability payment, in which lengthen account payable hence shorten cash cycle, then match it with the corresponding asset maturity. also, with Trade credit is flexible and always available on demand especially for a high reputation firm (international corporate). It also beneficial from earn cash discounts by making payments before the expiry of the credit period. Short term loan is chosen because it is a fixed amount of money borrow with specific term such as fixed interest rate, which would help my company to deal with fluctuation in the market....