Brentax Co Ltd. is engaged in the manufacture of a product which involves using sizable quantities of copper and silver. A substantial value of inventory is stored at its central warehouse, some miles away from the production site. The company has a trucking fleet of more than 50 vehicles. Given the volatility in the copper and silver market, the risk of changes in the price for these commodities is high. Moreover, the company faces the threat of theft or vandalism to their products at the central warehouse. The company is also exposed to the possibility of fire, theft and accident during the operation of their fleet of trucks. Brentax Co Ltd is envisaging a growth strategy and intends to apply for a loan of $1.0 million with its local bank, with an interest rate swap. It can negotiate a four-year interest rate swap with an 8 per cent fixed rate. Prime rate at the date the contract is set up at 7.5 %. Variable rates for the subsequent years is forecasted at 8.5 %, 9.5 % and 9% respectively.

Required: (a) Distinguish between business and financial risk. (5 marks)

(b) Advise Brentax Co Ltd on how it can manage the risks facing the company. (15 marks)

(c) Assuming the $1.0 million loan is contracted, show the total interest rate swap payable. (5 marks)