Question 4 - Interest Rate Risk The following financial information related to Gorwa Co: Income statements...

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Question 4 - Interest Rate Risk The following financial information related to Gorwa Co: Income statements Sales (all on credit) Cost of sales Operating profit Finance costs (interest payments) Profit before taxation Statement of financial position Non-current assets Current assets Inventory Trade receivables Current liabilities Trade payables Overdraft Net current assets 8% Bonds $000 4,600 4,600 9,200 4,750 3,225 7,975 2007 2007 $000 37,400 34,408 2,992 355 2,637 $000 13,632 1,225 14,857 2,425 12,432 $000 2,400 2,200 4,600 2,000 1,600 3,600 2006 $000 26,720 23,781 2,939 274 2,665 2006 $000 12,750 1,000 13,750 2,425 11,325 Capital and reserves Share capital Reserves 6,000 6,432 12,432 Required: 6,000 5,325 11,325 The average variable overdraft interest rate in each year was 5%. The 8% bonds are redeemable in ten years' time. Discuss, with supporting calculations, the possible effects on Gorwa Co of an increase in interest rates and advise the company of steps it can take to protect itself against interest rate risk. (7 marks) Question 4 - Interest Rate Risk The following financial information related to Gorwa Co: Income statements Sales (all on credit) Cost of sales Operating profit Finance costs (interest payments) Profit before taxation Statement of financial position Non-current assets Current assets Inventory Trade receivables Current liabilities Trade payables Overdraft Net current assets 8% Bonds $000 4,600 4,600 9,200 4,750 3,225 7,975 2007 2007 $000 37,400 34,408 2,992 355 2,637 $000 13,632 1,225 14,857 2,425 12,432 $000 2,400 2,200 4,600 2,000 1,600 3,600 2006 $000 26,720 23,781 2,939 274 2,665 2006 $000 12,750 1,000 13,750 2,425 11,325 Capital and reserves Share capital Reserves 6,000 6,432 12,432 Required: 6,000 5,325 11,325 The average variable overdraft interest rate in each year was 5%. The 8% bonds are redeemable in ten years' time. Discuss, with supporting calculations, the possible effects on Gorwa Co of an increase in interest rates and advise the company of steps it can take to protect itself against interest rate risk. (7 marks)

Answer rating: 100% (QA)

An Increase in interest rates will have a greater effect on Gorwa Co particularly on its financial performance and balance sheet We can discuss these ... View the full answer