Background

MeatCo Ltd is a company listed on the JSE Ltd under the Food Processing Sector. The company is vertically integrated with a number of abattoirs and processing factories. The meat is processed for the local and domestic market. All the abattoirs and processing plants have been certified as sustainable and well managed by the Beef Stewardship Council BSC. The companys main abattoir and processing plant is in Johannesburg with a full complement of personnel to service, equip and maintain the components in the value chain. The facility is capable of processing 24 000 000 metric tonnes of meat per annum. Valueadded products include products such as polonies, ham and microwaveable food. Products are processed at the companys value add processing plant. According to an industrial survey conducted by Department of Trade and Industry, the value add plant is one of the most technologically advanced food processing plants in the Southern Hemisphere. The capacity of the valueadded factory is 7 500 000 tonnes per annum.

Report on operations

The electricity supply to Gauteng was severely disrupted in 2021 due to problems experienced with the national electricity grid and the shortage had to be supplemented with backup generators. The electricity usage for the factory is approximately 0.5kWh per tonne for the main processing plant and 0.25kWh for the value add plant. The company pays R1 500 per kWh. Total electricity required for the plants is 157 500kWh per annum. The running cost to produce 1kWh with the diesel generators was R3 600 for 2021. The cost per diesel generator was R150 000, including installation. The generators are imported, with a purchase price of 10 000 at an exchange rate of R14.55. Currently, one generator is installed at the processing plant and one generator at the value add plant. The company has a diesel storage capacity of 2 000l at each of the plants. Fuel consumption is approximately 100l per kWh per generator. Each generator can be run for a maximum of 10 hours per day. The company also has an agreement with a fuel supplier to have fuel on standby when needed. Financial results The business was severely disrupted by unreliable electricity supply and the processing units were not able to operate at full capacity. A large portion of the meat was wasted due to the inability of the processing plants to process the meat. Refer to the table on page 4 for information on electricity availability. Sales The company can sell the full production per annum. Products from the processes plan is sold at R50 per kg and from the value add plant is sold at R30 per kg.

Operating costs

The operating cost of the abattoirs and processing plants are R500 000 000 per annum. Salaries related to processing are R30 000 000 per annum. Electricity cost is based on the prices charged by the national grid. The backup generators are used in the case of electrical shortages from the national grid. Warehouse Due to the electricity shortages, R13 000 000 of stock in the warehouse was damaged in 2021. In terms of the insurance policy, this event type is insured and has an annual limit of R10 million. The company submitted five successful claims for soiled stock.

Processing plant	Jul	Aug	Sep	Oct	Nov	Dec
kWh required for full production	10 000	10 000	10 000	10 000	10 000	10 000
Available from national grid
Value Add Plant
Available from national grid	3 125
Production plant	Jul	Aug	Sep	Oct	Nov	Dec
kWh required for full production	10 000	10 000	10 000	10 000	10 000	10 000
Available from national grid
Value Add Plant
Available from national grid	3 125	3 125	3 125	3 125	3 125	3 125

Insurance cover

The company uses insurance to transfer the financial consequences of certain, specified risk to an insurance company. The current premium is R2.5 million per month and the policy conditions and premium is reviewed on an annual basis. A straight deductible of R100 000 is applicable for all covered events related to production and storage. Business interruption insurance with recovery periods less than 18 months such as disruptions in electricity supply has an annual limit of R15 000 000 per annum without any deductibles applicable.

Deposit rates

Cash deposits earn 5% per annum.

Board fees

Risk related fees for nonexecutive directors are R20 000 per meeting and four meetings were held with all the nonexecutive directors attending the meetings. The risk committee is chaired by a nonexecutive director with another two nonexecutive directors as standing members. The chair receives R40 000 per meeting.

Risk appetite

The board has reported to shareholders that the company has a low risk appetite, has identified all the risk and have the appropriate risk management and risk financing strategies in place.

Risk management department

The cost of the risk management department is R8 500 000.

Question 1

Calculate the semi-annual as well as the annualized FIXED RATE on this swap. Semi-annual swap rate: %

Annualized swap rate: %

Enter your answer as a percentage, rounded to two decimal places (e.g., 9.87).

Question 2

Assume that the semi-annual fixed or swap rate is 2.00% and calculate the FIXED RETURN (total of discounted payments) by completing the following table:

1st payment (020 days): 997000 2nd payment (200 days):

3rd payment (380 days):

4th payment (560 days):

Notional amount:

TOTAL (FIXED RETURN):

Round every input to the nearest Rand value if required (e.g., 1234567).

Question 3

Calculate the value of the equity payment or EQUITY RETURN. Equity return:

Question 4

Determine the MARKET VALUE of a swap to pay the fixed return and receive the equity return. Market value:

Select one of the alternatives.