Financial Risk Management

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

Question

Katangwa Limited will need to borrow ₦50 million in three months’ time for a period of six months. The company is concerned that interest rates are expected to rise over the next few months.

Interest rates and forward rate agreements (FRAs) are currently quoted as follows:

Spot 5.75 – 5.50
3 – 6 FRA 5.82 – 5.59
3 – 9 FRA 5.94 – 5.64

Required:

a. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on the basis that interest rates: i. Rise to 6.50% ii. Fall to 4.50%

(8 Marks)

b. Compare the use of interest rate futures with FRA in this instance. (4 Marks)

c. Explain how interest rate guarantees or a short-term interest rate cap could be used. (3 Marks)

Answer

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Tags: Financial risk management, Forward Rate Agreement, Interest Rate Futures, Interest Rate Risk, Short-term Interest Rate Cap
Level: Level 3

Topic: Financial Risk Management
Series: MAY 2018

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

Question

Xeco is considering a N15 million expansion to increase profit before interest and tax by 20%. Financial details for Xeco are as follows:

Item	Amount (N’000)
Profit before interest	13,040
Finance charges (interest)	(240)
Profit before tax	12,800
Taxation	(3,840)
Profit for the year	8,960

Financing Options:

Debt: Issue N15m in 8% loan notes, with each note at a nominal value of N100.
Equity: 1-for-4 rights issue at a 20% discount to current share price (N6.25/share). Xeco has 12 million shares outstanding.
Corporate tax rate: 30%.

Required:

a. Evaluate whether Xeco should finance the expansion with debt or equity. (10 Marks)
b. Explain the relationship between systematic and unsystematic risk. (5 Marks)
c. Discuss the assumptions made by the Capital Asset Pricing Model (CAPM). (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: CAPM, Debt Financing, Equity Financing, Rights Issue, Risk analysis, Systematic risk, Unsystematic Risk
Level: Level 3

Topic: Financial Risk Management
Series: NOV 2023

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

Question

Katangwa Limited will need to borrow ₦50 million in three months’ time for a period of six months. The company is concerned that interest rates are expected to rise over the next few months.

Interest rates and forward rate agreements (FRAs) are currently quoted as follows:

Spot 5.75 – 5.50
3 – 6 FRA 5.82 – 5.59
3 – 9 FRA 5.94 – 5.64

Required:

a. Explain how a forward rate agreement (FRA) may be useful to the company. Illustrate this on the basis that interest rates: i. Rise to 6.50% ii. Fall to 4.50%

(8 Marks)

b. Compare the use of interest rate futures with FRA in this instance. (4 Marks)

c. Explain how interest rate guarantees or a short-term interest rate cap could be used. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial risk management, Forward Rate Agreement, Interest Rate Futures, Interest Rate Risk, Short-term Interest Rate Cap
Level: Level 3

Topic: Financial Risk Management
Series: MAY 2018

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

Question

Xeco is considering a N15 million expansion to increase profit before interest and tax by 20%. Financial details for Xeco are as follows:

Item	Amount (N’000)
Profit before interest	13,040
Finance charges (interest)	(240)
Profit before tax	12,800
Taxation	(3,840)
Profit for the year	8,960

Financing Options:

Debt: Issue N15m in 8% loan notes, with each note at a nominal value of N100.
Equity: 1-for-4 rights issue at a 20% discount to current share price (N6.25/share). Xeco has 12 million shares outstanding.
Corporate tax rate: 30%.

Required:

a. Evaluate whether Xeco should finance the expansion with debt or equity. (10 Marks)
b. Explain the relationship between systematic and unsystematic risk. (5 Marks)
c. Discuss the assumptions made by the Capital Asset Pricing Model (CAPM). (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: CAPM, Debt Financing, Equity Financing, Rights Issue, Risk analysis, Systematic risk, Unsystematic Risk
Level: Level 3

Topic: Financial Risk Management
Series: NOV 2023

Topic: Financial Risk Management

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FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

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FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

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FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

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FM – May 2018 – L3 – SC – Q5 – Financial Risk Management

Use of forward rate agreements and interest rate management tools for borrowing concerns in Katangwa Limited.

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FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

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