EXAMINATION : FINAL LEVEL

SUBJECT : INTERNATIONAL FINANCE

CODE : C3

EXAMINATION DATE : THURSDAY, 7TH NOVEMBER, 2024

TIME ALLOWED : THREE HOURS (9:00 A.M. – 12:00 NOON)

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GENERAL INSTRUCTIONS

1. There are TWO Sections in this paper. Sections A and B which

comprises total of SIX questions.

2. Answer question ONE in Section A.

3. Answer FOUR questions in Section B.

4. In total answer FIVE questions.

5. Marks are shown at the end of each question.

6. Show clearly all your workings for the respective answers where applicable.

7. State clearly any assumptions made in your answers where applicable.

8. Calculate your answers to the nearest one decimal point where necessary.

9. Graph papers and mathematical tables will be provided where applicable.

10. This question paper comprises 7 printed pages.

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SECTION A
Compulsory Question
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QUESTION 1
(a) MKIKA Company, a German engineering firm, borrowed €20 million in March 2024
at a fixed rate of 12% per annum. The loan is due to be repaid in March 2025. The
LIBOR in March 2024 was 12% per annum, and MKIKA believes that the LIBOR
will decrease over the next year. Therefore, they would like to explore the possibility
of an interest rate swap. Bonge Commercial Bank, MKIKA’s bank, has offered to
arrange an interest rate swap for one year with KISADA Company, which has
obtained floating rate finance at LIBOR plus 1.25%.

The terms of the swap require that MKIKA Company will pay LIBOR plus 1.5% to
KISASA Company. Conversely, KISASA Company will pay 13.5% to MKIKA
Company. Additionally, the corporate tax rate is 35%.

During the directors’ meeting, one of MKIKA’s directors questioned whether this
swap arrangement would benefit the company, expressing uncertainty. However, it
was agreed that the swap arrangement would go ahead on the terms proposed by
Bonge Commercial Bank.

REQUIRED:
(i) Advise MKIKA Company on the worthiness of the proposed swap, assuming
LIBOR is expected to be 10% per annum for the whole year.
(8 marks)
(ii) Explain any four (4) benefits MKIKA can gain from the interest swap
arrangement. (8 marks)
(b) Covered and uncovered interest arbitrage are two distinct strategies used in foreign
exchange markets to exploit differences in interest rates.

REQUIRED:

Explain the meaning of each and state any two (2) differences between the two.
(4 marks)
(Total: 20 marks)

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SECTION B
There are FIVE questions. Answer ANY FOUR questions.
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QUESTION 2

(a) Among recent developments that have changed the finance field and are likely to
shape its future is fintech and cloud computing.

REQUIRED:

(i) Explain the meaning of fintech and state any three (3) of its potential risks.
(6 marks)

(ii) Briefly discuss the application of cloud computing in financial services.

(4 marks)

(b) You are a financial consultant working with a Tanzania based multinational firm.
The firm’s Managing Director has approached you to assist in an urgent investment
decision. The firm is planning to invest in the UK, Kenya and the USA. Currently, it
has no business in these countries. The firm considers establishing an equally
invested two-investment portfolio comprising investments in any two of the three
countries. A preliminary appraisal of investment in each country was carried out, the
results are detailed in the table below.

UK Kenya USA
Expected Return 20% 10% 30%
Standard Deviation 8% 6% 15%

The covariance of returns of securities between investments is estimated to be:

UK – Kenya -19.2
UK – USA -84.0
USA – Kenya 81.0

REQUIRED:
Compute the risk and return of alternative investment portfolios and advise the firm
on the appropriate investment portfolio based on portfolio relative risk.
(10 marks)
(Total: 20 marks)

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QUESTION 3

(a) The activities involved in international capital budgeting are similar to those in
domestic capital budgeting, except that foreign investment appraisal involves several
complexities.

REQUIRED:
Explain any four (4) complexities involved in appraising foreign investments.
(8 marks)

(b) UPEPO Corporation currently has no existing business in Germany but is

considering establishing a subsidiary there. The following information has been
gathered to assess this project:

1. The initial investment required to start the project would be €50 million to
purchase plant and equipment.

2. The plant is expected to have useful life of 10 years and would be depreciated
using the straight-line method.
3. The project would be terminated at the end of Year 3, when the subsidiary would
be sold.
4. UPEPO expects to receive €33 million when it sells the subsidiary, which would
be equal to the book value at the end of Year 3.
5. The price, demand, and variable costs of the product in German are as follows:

Year Price (€) Demand (Units) Variable Cost (€)

1 505 40,000 30
2 520 50,000 35
3 540 60,000 40

6. The fixed cost, such as overhead expenses, is estimated to be €6 million per year.

7. The risk-free interest rate in Tanzania is estimated to be 12% while in German it

is 10%. These have been assumed to prevail over the next three years while the
exchange rate of the Euro is expected to be TZS.2,400 at the end of year 3.

All cash flows received by the subsidiary are to be sent to the parent company at
the end of each year. The German government would impose an income tax of
30%. In addition, it would impose withholding tax of 10% on earnings remitted
by the subsidiary. The Tanzania government would allow a tax credit on
remitted earnings and would not impose any additional taxes. UPEPO requires a
20% rate of return on this project.

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 REQUIRED:

Advise UPEPO on the economic viability of this project. (12 marks)

(Total: 20 marks)

QUESTION 4

(a) Mpindo Limited which operates in the same industry as Isansa Limited, notices the
latter’s struggles due to a leadership crisis, resulting in poor performance. Seizing
the opportunity, Mpindo Limited proposes a bid to acquire Isansa Limited. The
agreement entails Mpindo Limited offering 0.7 of its own shares for each share of
Isansa Limited. Notably, this acquisition does not promise any economies of scale or
operating synergy.

The relevant financial data of the two companies are as follows:

Mpindo Limited Isansa Limited

Net Sales TZS.503,000,000 TZS.178,000,000
Profit after tax TZS.88,000,000 TZS.18,000,000
No. of shares 18,000 4,500
Price per share 50,000 30,000
Price Earning (P/E) Ratio 10 8

REQUIRED:

Calculate the following for the combined Company providing brief implication of
each:

(i) Earnings per share (3 marks)

(ii) Weighted average P/E ratio (2 marks)
(iii) Market value per share (2 marks)
(iv) Total market capitalization (2 marks)
(v) The premium received by Isansa Limited (3 marks)

(b) Using examples, discuss any four (4) factors that influence the value of an option
contract on an equity security. (8 marks)
(Total: 20 marks)

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QUESTION 5

(a) Multinational corporations engage in Foreign Direct Investment (FDI) for a variety
of strategic reasons, including boosting economic growth in the host countries.

REQUIRED:
Discuss any three (3) strategic reasons for engaging in FDI. (6 marks)

(b) Mikocheni Ltd is a Tanzania-based manufacturer of household appliance. The Board

of Directors of Mikocheni Ltd is investigating the possibility of buying another
company, Sinza Ltd which is a successful retailer of electrical goods. The Board has
obtained the following information about Sinza Ltd:

Earnings and cash flows for the year ended TZS.700,000,000

30th June 2024
Expected growth of earnings and cash flows 15%
Book value of equity at 30th June 2024 3,6000,000,000
Average industry P/E ratio 11
Cost of capital 12%

Mikocheni’s Board has no experience of buying another company and you have
been invited to the next Board meeting to advise them on a number of issues.

REQUIRED:

(i) Estimate the range of value reasonable for Sinza on 30th June 2024.
(5 marks)
(ii) Explain why many acquisitions do not benefit the bidding firm.
(3 marks)

(c) Msolwa Ltd, a Tanzania based cement manufacturing company imports Alkalis, a
chemical used in cement manufacturing process. It has received a consignment of
Alkalis from a supplier in China. The invoice value of Chinese Yuan 2 million is
payable two months from now. The Treasury Manager of Msolwa Ltd is worried
about volatility in the Tanzania shillings to Chinese Yuan exchange rate.

REQUIRED:

(i) Explain how local currency invoicing would be used as a strategy for managing
currency risk exposures. (3 marks)

(ii) Advise the Treasury Manager on the benefit and risk of handling Msolwa Ltd
currency risk exposure using local currency invoicing. (3 marks)
(Total: 20 marks)

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QUESTION 6

(a) Shelli’s Medics is a Tanzania company that sells Tanzania made pharmaceutical
products around the world. Last month, a former colleague of yours, a MSc (A&F)
holder Magulu Ahmed, was appointed as a Chief Financial Officer (CFO) of the
company. This is his first senior position appointment.

Magulu understands that the finances of Shellis’s Medics Company are dominated
by receipts of funds, often from outside Tanzania, in respect of pharmaceutical
product sales. In addition, he noted that the previous Chief Financial Officer did not
make any attempt to hedge the company’s foreign exchange transaction exposure.
Magulu is particularly concerned about a receipt of £125,000 that is due to be
received by Shelli’s Medics in 30 days from a UK customer. He feels that actions
should be taken to hedge this exposure although other officers disagreed with him.
He is aware that forward market contracts, option contracts and futures contracts
may be potential in achieving this. However, he lacks detailed knowledge of these
instruments and has contacted you urgently by e-mail for advice.

In his e-mail to you he has further informed you that the company’s bankers have
advised him that he could opt for one of the following alternatives:

1. Purchase a 30 day forward contract to sell the £125,000 forward, the 30 day
forward quotation for the pound sterling (£) being £: TZS.2,660 -2,700.
2. Use a 30 day sterling futures at a price of TZS.2,600/£ (contract size £62,500).
3. Buy pound sterling option with a strike price of TZS.2,590 at a premium of
TZS.30 per pound sterling (Contract size £31,250).

The £ spot exchange rate is currently TZS.2,690 - 2,695 and market analysts in
Tanzania are currently suggesting that the £ is expected to trade in a range from
TZS.2690 – 2,695 for the next month.

REQUIRED:

(i) Advise Magulu whether a forward contract should be purchased and

calculate how much the total cash flow to Shelli’s Medics Company will be
in 30 days should the company decide to take a forward market hedge.
(4 marks)

(ii) Advise Magulu whether put or call options should be purchased and calculate
the number of option contracts that the company would need to enter into in
order to hedge its sterling receipts. (4 marks)

(iii) Advise Magulu whether to take a long or short position in sterling futures
contracts and calculate the required number of futures contracts to hedge the
sterling receipts. (3 marks)

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 (b) Discuss how each of the following is used in forecasting exchange rate. Among
other things, your discussion should highlight the strong points and weak points of
the approach:
(i) Fundamental analysis. (3 marks)
(ii) Technical analysis. (3 marks)
(iii) Purchasing power parity. (3 marks)
(Total: 20 marks)

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