Questions QUESTION ONE (10 Marks) (One Page only strictly for this question (a and b together). 5 marks deduction for every entry into the next page.) Should be properly cited. Organisations are faced with many risks, which include many types of economic risks, among them interest rate risks. Based on the above background a. Describe and discuss the different types of interest risk (5marks) b. Describe the characteristics and benefits of interest rate swaps compared with other forms of interest rate risk management, such as forward rate agreements and interest rate futures (5 Marks) QUESTION TWO (10 Marks) (One Page only strictly for question a and b together). 5 marks deduction for every entry into the next page.) Should be properly cited in-text and reference. WaFloro Co is a KABWE-based company which has the following expected transactions... One month: Expected receipt of $240,000 One month: Expected payment of $140,000 Three months: Expected receipts of $300,000 As the Corporate Finance Manager for WaFlo CO. you collect the following information: Spot rate ($ per K): 1.7820 0.0002 One month forward rate ($ per K): 1.7829 0.0003 Three months forward rate ($ per K): 1.7846 0.0004 Money market rates for WaFlo Co: Borrowing Deposit One year Kwacha interest rate: 4.9% 4.6 One year dollar interest rate: 5.4% 5.1 Assume that it is now 1 April. Required: (a) Discuss the differences between transaction risk, translation risk and economic risk. (1.5 Marks) (b) Explain how inflation, Interest rates can be used to forecast exchange rates. (1.5Marks) (c) Calculate the expected Kwacha receipts in one month and in three months using the forward market. (3.5 Marks) (d) Calculate the expected Kwacha receipts in three months using a money-market hedge and recommend whether a forward market hedge or a money market hedge should be used. (3.5 Marks) QUESTION THREE (20 Marks) Manny Co is a listed company that plans to spend K10m on expanding its existing business. It has been suggested that the money could be raised by issuing 9% loan notes redeemable in ten years time. Current financial information on Manny Co is as follows. Income statement information for the last year K000 Profit before interest and tax 7,000 Interest (500) Profit before tax 6,500 Tax (1,950) Profit for the period 4,550 Balance sheet for the last year K000 K000 Non-current assets 20,000 Current assets 20,000 Total assets 40,000 Equity and liabilities Ordinary shares, par value 5,000 Retained earnings 22,500 Total equity 27,500 10% loan notes 5,000 9% preference shares, par value 2,500 Total non-current liabilities 7,500 Current liabilities 5,000 Total equity and liabilities 40,000 The current ex div ordinary share price is K450 per share. An ordinary dividend of K35 per share has just been paid and dividends are expected to increase by 4% per year for the foreseeable future. The current ex div preference share price is K76. The loan notes are secured on the existing non-current assets of Manny Co and are redeemable at par in eight years time. They have a current ex interest market price of K105 per K100 loan note. Manny Co pays tax on profits at an annual rate of 30%. The expansion of business is expected to increase profit before interest and tax by 12% in the first year. Manny Co has no overdraft. Average sector ratios: Financial gearing: 45% (prior charge capital divided by equity capital on a book value basis) Interest coverage ratio: 12 times Required: (a) Calculate the current weighted average cost of capital of Manny Co. Using Market Values and Book Values (10 marks) (b) Discuss whether financial management theory suggests that Manny Co can reduce its weighted average cost of capital to a minimum level. (5 marks) Assume that the dividend growth rate of 4% is unchanged.