FIN4802 Assignment 1 (COMPLETE ANSWERS) 2025 (244150) - DUE 21 May 2025

Question 1 (8 Marks) Mkhize Ltd would like to assess the country risk of South Africa. Mkhize Ltd has identified various political and financial risk factors, as shown below. Political Risk Factor Assigned Rating Assigned Weight Blockage of fund transfers 7 65% Bureaucracy 3 55% Financial Risk Factor Assigned Rating Assigned Weight Interest rate 5 30% Inflation 6 20% Exchange rate 5 11% Competition 4 35% Growth 7 30% Mkhize Ltd has assigned an overall rating of 85 percent to political risk factors and of 35 percent to financial risk factors. The investment policy for Mkhize Ltd mentions that the company can only invest in a country if the country's risk is below 8.5. Should Mkhize Ltd consider South Africa for investment? [8] Question 2 (15 marks) Tshepo Molefe is a foreign exchange dealer with Investec South Africa. He notices the following quotes: Spot exchange rate ZAR1.3220/BWP 1 year forward exchange rate ZAR1.1492/BWP 1 year BWP interest rate 5.00% per year 1 year ZAR interest rate 7.50% per year a) the interest rate parity holding? You may ignore transaction costs. (3) b) With the aid of calculations, show whether or not an arbitrage opportunity exists. (2) c) In the event that there is an arbitrage opportunity, you are required to demonstrate all the steps that need to be taken to make an arbitrage profit. Assume that Tshepo Molefe is authorised to work with BWP1 000 000 in the Botswana Pula market, or ZAR1 322 000 in the South African Rand market. Compute the arbitrage profit. (7) Question 3 (27 marks) Greeley plc. is a U.S.-based multinational firm (MNF) that purchases most of its materials from Australia and generates a small portion of its sales from exporting to Australia. Its U.S. sales are denominated in U.S. dollars, while its Australian sales are denominated in Australian dollars (AUD). Using the cost and revenue information shown for Greeley plc. in Exhibit 1 determine how the costs, revenue, and cash flow items would be affected by three possible exchange rates for the Australian dollar: (1) AUD= US$0.75, (2) AUD = US$0.80, or (3) AUD = US$0.85. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that Australian AUD earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Exhibit 1 - Estimated Sales and Expenses for Greeley’s U.S. and Australian Business Segments (in Millions) U.S. Business Australian Business Sales $320 AUD 4 Cost of materials $ 50 AUD 200 Operating expenses $ 60 - Interest expenses $ 3 AUD 10 Cash flows $207 -AUD 206