Interest rate parity is the method of predicting foreign exchange rate based on the hypothesis the different between the interest rate in two countries should offset the difference between the spot rate and the forward foreign exchange rate over the same period.

Purchasing power parity is the rate theory that states that the exchange rate between two currencies is the same in equilibrium when the purchasing power of currency is the same in each country.

𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒=𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 𝑥 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜; ₵100=20 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒= ₵6
∴𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒=20𝑥6=₵120

𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚; 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑢𝑝𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒
𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑢𝑝𝑜𝑛= ₵123
𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒= ₵120
∴𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚=123−120=₵3

The share price is less than the bond market value. This will not be attractive to the bondholders. The share price have to increase by at least 2.5% [(3/120) x100] for it to be attractive to bond holders.

The random walk theory is based on the fact that share prices will reflect every available information such that prices will alter when new information becomes available. The assumptions include the following:

• All information about a company is available to all potential shareholders;
• The intrinsic value of shares will change to reflect new information available;
• All investors will act rationally;
• There will be no insider dealings.

Loan Amount (C)                         300,000
Interest rate (r)                              25%
No. of years (n)                             5
Annuity (DF)                                2.68928 or 2.689
Annual Instalment                        111,554.02

• Interest charged is not predictable, as it depends on a variable interest rate and on the amount overdrawn on each day of the charging period.
• The lender may not grant the entire amount requested, as changing financial situation of the business will be taken into consideration.
• Overdrafts are repayable on demand, which may occur at a time when management are not ready.
• Company may be forced to convert a hardcore overdraft into a loan term which can affect capital structure especially where the preference for overdraft was for managing the capital structure.
• Management will need to spend time strictly monitoring their accounts to ensure they operate within the overdraft limit.
• Time will need to be spent preparing management accounts and monitoring compliance with covenants

This is a type of partnership contract where only one partner (rab al mal) contributes finance and the other partner (mudarib) contributes skills and expertise. The partner who contributes finance has no right to interfere in the day to day affairs of the partnership.

This is an equity financing contract for investment in business ventures or specific business projects and consist of at least two partners called the mushasrik. The mushariks jointly contribute capital and expertise in the business.

This is a deferred payment sales or an instalment credit sale usually for the purchase of goods for immediate use. The seller therefore sells goods to the buyer, and the buyer pay later by instalments.

Mining company is a profit making company but municipal assembly is a not-for-profit organization. Their investment appraisal objectives will be different.

• Very few municipal assemblies’ will have capital investment with the view to making financial returns. Even where this is done, the objective is not for distributing the profits to shareholders.
• On the decision about mutually exclusive projects, a mining company will prefer a project with the highest NPV. But a municipal assembly will prefer the highest social benefit over financial benefit.
• A municipal assembly will be dependent on an interest rate set by government for its investment appraisal analysis. But a mining company will use a commercial rate of return which may be internally determined or by market forces.
• A municipal assembly may invest in public infrastructure and community development. But a mining company may invest in noncurrent assets such as Plant and machinery, research and development and advertising.
• A municipal assembly will depend on cost-benefit analysis instead of financial analysis for a decision on investment projects. But a mining company will depend on discounted cash flow analysis that takes accounts of time value of money for its analysis.
• A municipal assembly may go beyond an NPV analysis to use the total welfare analysis which may include benefits not measurable in monetary terms. This may lead to prioritising a negative NPV project. A mining company with a profit focus will not accept a project with negative NPV.
• Cost benefit analysis is considered superior to a municipal assembly where as a discounted cash flow analysis is considered superior for a mining company which will be profit focused.

Advise to management: Project has a positive NPV of GHS56,550. It should therefore be implemented

Restrictive or aggressive approach
With a restrictive policy, current assets are financed through short term funds. Firms with restrictive working capital policies demonstrate the following:

• Keeping low cash balances and making little investment in marketable securities;
• Making small investments in inventory;
• Allowing few or no credit sales, thereby minimizing accounts receivable.

Flexible or conservative approach
Firms that adopt a flexible or conservative approach to the management of working capital to have a higher investment in current assets. The objective is to reduce the risk of stock out and to maintain high liquidity. Flexible or conservative approach to working capital management results in the following:

• Keeping large balances of cash and marketable securities;
• Granting liberal credit terms, which results in a high level of accounts receivable;
• Making large investments in inventory.

Moderate approach
This is the middle ground between the conservative and the aggressive approach

Amount required from EDAIF = 118,904.11 – 46,301.37 = 72,602.74

Financial intermediaries are financial institutions established to mobilise funds from lenders and channel them to borrowers

Disintermediation is the use of financial market for lenders and borrowers to directly transact thereby eliminating the functions of intermediaries.

Government aims at controlling the amount of money in circulation. Government policies to reduce money in circulation can affect business activities in several was as follows.

• Affect borrowing cost as government may increase its borrowing rates to attract patronage of government bills and bonds with the view to mopping up excess liquidity.
• Policies may divert investment from the private sector as strict credit controls will limit amount available for credit.
• There could be difficulties in securing funds for expansion and long term projects.
• Increased borrowing cost will put pressure on share prices thereby making it difficult to raise funds from shares.
• There would be decrease in consumer demand as a result of increased prices from the high interest.
• Decrease in disposable income due to increase in loan and mortgage repayments.
• High interest rate may increase the cost of local produce and thereby encourage consumption of imports.
• The increase in consumption of imports can result in balance of payment difficulties if exports fall as a result of increase in the prices of exports. Increased imports will result in increased demand for foreign currency leading to depreciation of the local currency.