Relation between exchange rate and the interest rate

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Reference no: EM13337892

JenCo is planning to expand their business. The expansion willrequire new assets totaling AED 15,000,000; 70% will be the fixedassets and 40% of the total current assets will be permanent innature. JenCo is considering two alternative asset-financingplans.

Plan 1:

Under this plan, all fixed assets and permanent current assetswill be financed using long-term debt; the rest of the assets willbe financed using short-term funds.

Plan 2:

Under this plan, all fixed assets and 50% of the permanent current assets will be financed using long-term funds and thebalance will be in short-term loans.

The cost of long-term financing is 12% and short-term at 9%. The expansion is expected to generate additional earnings beforeinterest and tax of AED 8,500,000. JenCo pays tax at the rate of25%.

Question:

1:- Calculate the net earnings after tax under eachplan and show all of your calculations clearly.

2:- Also define that what is the relation between Exchange Rate and the Interest Rate? If exchange rate increases then what will be the effect on interest rate….viceversa?

Reference no: EM13337892

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