Consider the following excerpt from this article about recent plans for a capital raising by Reece Limited, an Australian listed company that specialises in supplying bathroom and plumbing products in Australia and New Zealand. ASX-listed plumbing supplies giant Reece has tapped the market with a $600 million capital raise, becoming the latest in a long list of companies seeking extra funds during the pandemic. Reece chief executive Peter Wilson said sales of hot water units and heating equipment had risen "substantially" in March as families anticipated a long period at home during the coronavirus outbreak. But despite the rise in sales, Mr Wilson said the capital raising was "really about fortifying the business, to be able to take advantage of the opportunities that will eventually arise". The company told the ASX it was a "pre-emptive and decisive" step that would strengthen its balance sheet and position it for the future. Reece will also "temporarily suspend dividend payments to shareholders. The money to be raised includes a fully underwritten $232 million accelerated pro rata non- renounceable entitlement offer, a fully underwritten $368 million institutional placement and a non-underwritten share purchase plan. The equity raising will be conducted at a price of $7.60 per new share, equal to a 12.5 per cent discount to the last traded price of $8.69 on Friday for Reece. The company said the funds would be used to support the business during the period of global economic uncertainty, increase liquidity and reduce net debt. The measures would increase the company's total liquidity position to $917 million, Mr Wilson said on an investor and analyst call. "We think we're being prudent, we think we've sized this right. We've done a lot of modelling on this, the good, the bad and the ugly, the worst-case scenario," Mr Wilson said. The company said that in its smallest market, New Zealand, trade had been "well down" in the last week of March and was likely to stay this way for the duration of the strict lockdown enforced by government But in Australia construction sites were still operating, while online sales were up about 90 per cent in March compared to March of last year. Reece shares are in a trading halt until this morning. Saranga Ranasinghe, vice president of Moody's Investors Service, said Reece's announcement was "credit positive as it will considerably strengthen the company's balance sheet and liquidity, and in turn support its ability to navigate the current challenging operating environment". Question 1 -21 marks The article points out that a lot of companies are seeking extra funds during the COVID19 pandemic. Reece is looking to strengthen its balance sheet by raising capital. a) Describe how the "$232 Million accelerated pro rata, non-renounceable entitlement offer (rights issue)" would operate, including details of how the following concepts work: (6 marks) Pro-rata (include an example) Non renounceable vs renounceable b) Explain the difference between the entitlement/rights offer in a) and the $368 Million institutional placement", including at least 2 advantages for Reece in including the placement in their capital raising. (4 marks) c) Explain what a 'non underwritten share purchase plan' is, including an example. In your answer include an explanation of underwriting' and the concept of: "fully underwritten' vs 'non underwritten'. (5 marks) d) How does the issue of more capital assist Reece's Balance Sheet? In your answer, also define/explain what 'debt and equity' are, describing at least I characteristic of each type of funding. (6 marks) Question 2 - 20 marks Reece noted in the article, that trade in their smallest market, New Zealand had been 'well down, and likely to stay that way. As Reece generates receipts in NZD, the company is concerned about potential volatility in the FX market for the next 3-6 months. Reece's FX dealer is quoting spot AUD/NZD 1.0531-40. In the context of this quote: a) Explain the terms: (2 marks- mark for description, mark for referencing the quote above) Base currency Terms currency b) Explain from the perspective of the dealer what the FX quote indicates, including in your answer reference to the bid' and 'offer prices. (4 marks) 1. II. c) Starting with the existing quotation, transpose the quotation and state the rule that applies to transposing existing rate quotes. (4 marks) d) The quote from the dealer is a spot transaction, but Reece is wanting to manage the risk of fluctuating currencies in the future. (10 marks) Describe what the 'value date' refers to when discussing FX transactions. (1 mark) i. ii. Explain the difference between the value date for 'spot' foreign exchange transaction, and Tod, Tom and Forward transactions? Give examples for each using the AUD/NZD quote above and/or assuming the date the transaction was entered into in is Monday 22 Jun. (8 marks) ili. What is the product that Reece would use to lock in currency prices on amounts being converted? (1 mark) Question 3 - 14 marks In producing their tapware, Reece imports copper and other metals to produce their tapware. The spot price of copper has fluctuated wildly since the onset of the COVID19 pandemic and Reece is due to order a new shipment in 3months time for end of year manufacturing. a) Ignoring currency risks/changes, identify the risk that the company faces in purchasing copper in 3 months time (ie what would harm company profits) and describe 2 types of derivative securities that you would recommend to manage this particular risk. (5 marks) b) Assuming you think the price of copper may increase, what financial strategy would the investment team at Reece follow if using futures contracts to hedge this risk in 3 months time? In your answer, outline: (9 marks) I what will occur today (include any costs to Reece)? (2 marks) il what will need to occur in 3 months time on the date of the physical market transaction and what is the outcome? (2 marks) what does 'marked-to-market' and 'maintenance margin call' mean for the investment team? (2 marks) what is the net outcome for Reece and why? (3 marks) iv. Consider the following excerpt from this article about recent plans for a capital raising by Reece Limited, an Australian listed company that specialises in supplying bathroom and plumbing products in Australia and New Zealand. ASX-listed plumbing supplies giant Reece has tapped the market with a $600 million capital raise, becoming the latest in a long list of companies seeking extra funds during the pandemic. Reece chief executive Peter Wilson said sales of hot water units and heating equipment had risen "substantially" in March as families anticipated a long period at home during the coronavirus outbreak. But despite the rise in sales, Mr Wilson said the capital raising was "really about fortifying the business, to be able to take advantage of the opportunities that will eventually arise". The company told the ASX it was a "pre-emptive and decisive" step that would strengthen its balance sheet and position it for the future. Reece will also "temporarily suspend dividend payments to shareholders. The money to be raised includes a fully underwritten $232 million accelerated pro rata non- renounceable entitlement offer, a fully underwritten $368 million institutional placement and a non-underwritten share purchase plan. The equity raising will be conducted at a price of $7.60 per new share, equal to a 12.5 per cent discount to the last traded price of $8.69 on Friday for Reece. The company said the funds would be used to support the business during the period of global economic uncertainty, increase liquidity and reduce net debt. The measures would increase the company's total liquidity position to $917 million, Mr Wilson said on an investor and analyst call. "We think we're being prudent, we think we've sized this right. We've done a lot of modelling on this, the good, the bad and the ugly, the worst-case scenario," Mr Wilson said. The company said that in its smallest market, New Zealand, trade had been "well down" in the last week of March and was likely to stay this way for the duration of the strict lockdown enforced by government But in Australia construction sites were still operating, while online sales were up about 90 per cent in March compared to March of last year. Reece shares are in a trading halt until this morning. Saranga Ranasinghe, vice president of Moody's Investors Service, said Reece's announcement was "credit positive as it will considerably strengthen the company's balance sheet and liquidity, and in turn support its ability to navigate the current challenging operating environment". Question 1 -21 marks The article points out that a lot of companies are seeking extra funds during the COVID19 pandemic. Reece is looking to strengthen its balance sheet by raising capital. a) Describe how the "$232 Million accelerated pro rata, non-renounceable entitlement offer (rights issue)" would operate, including details of how the following concepts work: (6 marks) Pro-rata (include an example) Non renounceable vs renounceable b) Explain the difference between the entitlement/rights offer in a) and the $368 Million institutional placement", including at least 2 advantages for Reece in including the placement in their capital raising. (4 marks) c) Explain what a 'non underwritten share purchase plan' is, including an example. In your answer include an explanation of underwriting' and the concept of: "fully underwritten' vs 'non underwritten'. (5 marks) d) How does the issue of more capital assist Reece's Balance Sheet? In your answer, also define/explain what 'debt and equity' are, describing at least I characteristic of each type of funding. (6 marks) Question 2 - 20 marks Reece noted in the article, that trade in their smallest market, New Zealand had been 'well down, and likely to stay that way. As Reece generates receipts in NZD, the company is concerned about potential volatility in the FX market for the next 3-6 months. Reece's FX dealer is quoting spot AUD/NZD 1.0531-40. In the context of this quote: a) Explain the terms: (2 marks- mark for description, mark for referencing the quote above) Base currency Terms currency b) Explain from the perspective of the dealer what the FX quote indicates, including in your answer reference to the bid' and 'offer prices. (4 marks) 1. II. c) Starting with the existing quotation, transpose the quotation and state the rule that applies to transposing existing rate quotes. (4 marks) d) The quote from the dealer is a spot transaction, but Reece is wanting to manage the risk of fluctuating currencies in the future. (10 marks) Describe what the 'value date' refers to when discussing FX transactions. (1 mark) i. ii. Explain the difference between the value date for 'spot' foreign exchange transaction, and Tod, Tom and Forward transactions? Give examples for each using the AUD/NZD quote above and/or assuming the date the transaction was entered into in is Monday 22 Jun. (8 marks) ili. What is the product that Reece would use to lock in currency prices on amounts being converted? (1 mark) Question 3 - 14 marks In producing their tapware, Reece imports copper and other metals to produce their tapware. The spot price of copper has fluctuated wildly since the onset of the COVID19 pandemic and Reece is due to order a new shipment in 3months time for end of year manufacturing. a) Ignoring currency risks/changes, identify the risk that the company faces in purchasing copper in 3 months time (ie what would harm company profits) and describe 2 types of derivative securities that you would recommend to manage this particular risk. (5 marks) b) Assuming you think the price of copper may increase, what financial strategy would the investment team at Reece follow if using futures contracts to hedge this risk in 3 months time? In your answer, outline: (9 marks) I what will occur today (include any costs to Reece)? (2 marks) il what will need to occur in 3 months time on the date of the physical market transaction and what is the outcome? (2 marks) what does 'marked-to-market' and 'maintenance margin call' mean for the investment team? (2 marks) what is the net outcome for Reece and why? (3 marks) iv