Borrowing – Knowsia

FM – May 2017 – L3 – Q6 – Financial Risk Management

Analyze the use of an interest rate swap between two companies for mutual benefit.

Question

Large Plc. (LP) wishes to borrow N200 million for five years to finance the purchase of new non-current assets. The preference of the company’s Directors is that these funds are borrowed at a fixed rate of interest. The company’s long-term debt is currently rated BBB, meaning LP would have to pay 6.5% p.a. for fixed rate borrowing. Alternatively, LP could borrow at a floating rate, i.e. the prime lending rate (PLR) + 2.25% at the present time.

The Directors of LP have recently been informed by its bank that TK Plc. is also currently looking to borrow N200 million for five years at a floating rate of interest, and its AA rating gives it access to floating rate borrowing at PLR + 1.50% per annum. TK Plc. would pay 5.50% per annum for fixed rate borrowing at the present time.

Required:

a. State FIVE reasons that a company might have for entering into an interest rate swap. (5 Marks)

b. Show how an interest rate swap could be used to the equal benefit of both companies, assuming that the terms of the swap agreement are such that LP’s swap payment to TK Plc. is to be 5.5% fixed per annum. (7 Marks)

c. Identify, with a supporting brief explanation, which of the two companies would be disadvantaged if the PLR were to fall consistently within the five-year term of the interest rate swap. (1 Mark)

d. Identify TWO risks that both companies will face, should they decide to enter into the interest rate swap agreement. (2 Marks)

Answer

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Tags: Borrowing, Interest Rate Swap, Risk Management
Level: Level 3

Topic: Financial Risk Management

PSAF – Nov 2016 – L2 – Q5b – Fiscal Policy and Public Finance

This question explains the adverse consequences that public debt can have on a nation's economy.

Question

Explain any THREE ways by which public debt can constitute a burden to the nation.

Answer

Find Related Questions by Tags, levels, etc.

Tags: adverse effects, Borrowing, Economic Challenges, Public Debt
Level: Level 2

Topic: Fiscal Policy and Public Finance
Series: NOV 2016

SCS – Nov 2019 – L3 – Q2b – Capital structure

Discuss the potential benefits and problems of converting short-term borrowing into long-term loans.

Question

i) Discuss the potential benefits and problems with proposals to convert the company’s short-term borrowings into a longer-term loan.

ii) Pay bigger cash salaries, or add a share option element to the remuneration packages.

iii) Maintain the dividend for 2019 at the 2018 level, or even reduce it further.

iv) Convert any surplus dollar cash into cedis.

(10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Borrowing, Currency Conversion, Financial structure, Foreign Exchange, Long-term loans, Risk Management
Level: Level 3

Topic: Capital structure
Series: NOV 2019

FM – May 2017 – L3 – Q6 – Financial Risk Management

Analyze the use of an interest rate swap between two companies for mutual benefit.

Question

Required:

a. State FIVE reasons that a company might have for entering into an interest rate swap. (5 Marks)

c. Identify, with a supporting brief explanation, which of the two companies would be disadvantaged if the PLR were to fall consistently within the five-year term of the interest rate swap. (1 Mark)

d. Identify TWO risks that both companies will face, should they decide to enter into the interest rate swap agreement. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Borrowing, Interest Rate Swap, Risk Management
Level: Level 3

Topic: Financial Risk Management

PSAF – Nov 2016 – L2 – Q5b – Fiscal Policy and Public Finance

This question explains the adverse consequences that public debt can have on a nation's economy.

Question

Explain any THREE ways by which public debt can constitute a burden to the nation.

Answer

Find Related Questions by Tags, levels, etc.

Tags: adverse effects, Borrowing, Economic Challenges, Public Debt
Level: Level 2

Topic: Fiscal Policy and Public Finance
Series: NOV 2016

SCS – Nov 2019 – L3 – Q2b – Capital structure

Discuss the potential benefits and problems of converting short-term borrowing into long-term loans.

Question

i) Discuss the potential benefits and problems with proposals to convert the company’s short-term borrowings into a longer-term loan.

ii) Pay bigger cash salaries, or add a share option element to the remuneration packages.

iii) Maintain the dividend for 2019 at the 2018 level, or even reduce it further.

iv) Convert any surplus dollar cash into cedis.

(10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Borrowing, Currency Conversion, Financial structure, Foreign Exchange, Long-term loans, Risk Management
Level: Level 3

Topic: Capital structure
Series: NOV 2019

Question Tag: Borrowing

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FM – May 2017 – L3 – Q6 – Financial Risk Management

Analyze the use of an interest rate swap between two companies for mutual benefit.

PSAF – Nov 2016 – L2 – Q5b – Fiscal Policy and Public Finance

This question explains the adverse consequences that public debt can have on a nation's economy.

SCS – Nov 2019 – L3 – Q2b – Capital structure

Discuss the potential benefits and problems of converting short-term borrowing into long-term loans.

FM – May 2017 – L3 – Q6 – Financial Risk Management

Analyze the use of an interest rate swap between two companies for mutual benefit.

PSAF – Nov 2016 – L2 – Q5b – Fiscal Policy and Public Finance

This question explains the adverse consequences that public debt can have on a nation's economy.

SCS – Nov 2019 – L3 – Q2b – Capital structure

Discuss the potential benefits and problems of converting short-term borrowing into long-term loans.

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