Exchange Rate Risks

CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

Question

Joojo Metals Ltd… has been your customer for the past twenty years. The company manufactures iron rods used in the construction of roads and houses and supplies wholesalers in Accera, Akim Oda, Nkawkaw, Nsawam and its environs.

The company sources its raw materials of iron scraps and ingons both locally and abroad, withThe company hasThe company has has been its profits eroded in 20221 due to the rapidly depreciating exchange rate of the cedi against foreigni currencies. The company has also faced increasing competition from other producers in Accera and Takorardi as well as cheaper imports from China China.

Joojo Banful owns $60%$ of the shares of the the company, whilst the remaining $ 40%$ is held by his childhood friend Fifii Awotwe who takes no active part in the management of the company.

Joojo serves as the CEO and General Manager of the company, whilst his wife, Mama Nelson, a chartered accountant serves as the Finance Director of the company. His factory Manager is Jonas Dadzzie, aged 62, a vastly experienced factory manager he recruited only a year ago. In addition, he has a pool of twenty skilled workers many of whom were poached from other companies.

The principal shareholder of the company, Joojo Banful is a noted supporter of the ruling government though he persistently denies that he has provided funding for the government.

The company’s factory is located at Tema in the Greater Accera Region of the country on a wide expanse of land. It is fitted with three huge warehouses, which are well stocked at all times. The company also has three articulator trucks which it uses for its supplies.

Jonas comes to you with a business proposition involving the provision of working capital finance for the supply of of iron rods to major government building construction projects running across the country. He tells you that this could give the business a major breakthrough and bring gains also to your bank. He is asking for working capital finance of GHC 3.0 million for this major expansion in scope of operations.

How would you respond to this proposition with respect to the provided financial statements and ratios on pages 3.4 & 5?

Profit and Loss Extracts for the year ending 30 Dec

Ratios

2019

2020

2021

[30 Marks]

Answer

Find Related Questions by Tags, levels, etc.

Tags: Competition, Exchange Rate Risks, Financial Analysis, Government Contracts, lending proposition, Manufacturing, Working Capital
Level: Level 3

Topic: Understanding the requirements of different types of business such as manufacturing
Series: OCT 2022

Deposit %	Borrowing %
Nigeria	13.25
West African Country	6.5

Deposit %

Borrowing %

Nigeria

13.25

West African Country

6.5

Build Nigeria Plc. (BNP) is a giant construction company with head office in Kano, Nigeria. It is involved in construction of roads, dams, airfields, etc., in many parts of the country. Recently, the company won construction contracts across a number of African countries. One of the contracts is for the construction of a dam for a country in Central Africa whose currency is Central African Dollar (C$). The dam has now been completed, and the retention money of C$210,000,000 is due for settlement in one year’s time.
The current spot exchange rate is C$40 = N1. Risk-free rate is 5% in Nigeria and 25% in the foreign country.
The Chief Finance Officer (CFO) of BNP is worried about the above financial statistics and concluded that BNP will lose as much as N840,000 due to exchange rate movements between now and the end of the year when the retention money is received.

Required:
Explain, showing all relevant calculations, how the CFO arrived at the potential loss of N840,000. (4 Marks)

b. In another contract in a country in the ECOWAS sub-region (with currency of W$), BNP expects the following payment and receipt in six months’ time:
You are provided with the following financial data:

Spot exchange rate:
N per W$1 = 1.4735 – 1.4755
Money Market Rates:

Deposit % Borrowing %

Nigeria 13.25

West African Country 6.5

Deposit %	Borrowing %
Nigeria	13.25
West African Country	6.5

Required:
Show how BNP can make use of money market hedge to mitigate the foreign exchange risk inherent in the above payment and receipt. Show all workings and the necessary steps.

(7 Marks)

c. Discuss TWO advantages and TWO disadvantages of forward exchange contracts.

(4 Marks)

Question Tag: Exchange Rate Risks

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CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

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CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

You're reporting an error for "CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company"

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

You're reporting an error for "FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management"

CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company

Evaluate a request for GHC 3.0 million working capital finance from a long-term customer manufacturing iron rods, aiming to supply government projects, considering eroded profits and provided financials.

You're reporting an error for "CML – OCT 2022 – L3 – Q1 – Lending to Iron Rod Manufacturing Company"

FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management

Address the calculation of potential exchange rate losses, money market hedging, and the advantages and disadvantages of forward contracts.

You're reporting an error for "FM – Nov 2014 – L3 – SC – Q7 – Foreign Exchange Risk Management"

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