Section B ( 40 marks ) Two Questions (answer all the questions) 1. TDK Ltd is a US-based company manufacturing and selli

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Section B ( 40 marks )
Two Questions (answer all the questions)
1. TDK Ltd is a US-based company manufacturing and selling Air
conditioners in the US market. TDK Ltd exports its products to the
United Kingdom. TDK Ltd is due to receive £6,000,000 in 3 months
from a customer for the United Kingdom. The following information
has been gathered by accounting staff related to the transactions
stated above.
Following information related to the money market has been given to
you.
Spot Rate: £ /$ 0.6422
3-month forward rate £ /$ 0.6731
Current interest rates: US prime 2.2% – 2.8% per annum
UK LIBOR 3.4% – 3.7% per annum
a. Advice the management of TDK Ltd, the possible outcome of using
the forward contract to mitigate the forex risk exposed in the
above transaction using the information given about the money
market. (support your answer with calculations)
(5 marks)
b. Advice the management of TDK Ltd, the possible outcome of using
the money market to hedge the forex risk exposed in the above
transaction using the information given about the money market.
(support your answer with calculations)
(10 marks)
c. Compare possible other methods available for mitigating the
above Forex risk.
( 10 marks )
(Total 25 marks)
2. TDK Limited has $8 million 4% debentures in issue. They are
redeemable in five years at a premium of 30%. Current market value
= $110 and Corporation tax = 30%
What is the post-tax cost of the debentures?
(Use 5% and 10% discounting factor in the calculation of IRR ) (15
marks)