effects of foreign exchange risk on firm value in the manufacturing and allied sector, a case of ...

109 Pages·2016·1.16 MB·English

EFFECTS OF FOREIGN EXCHANGE RISK ON FIRM
VALUE IN THE MANUFACTURING AND ALLIED
SECTOR, A CASE OF DESBRO KENYA LIMITED

BY
CHAUDHRY MOHAMED FIZAN

UNITED STATES INTERNATIONAL UNIVERSITY –
AFRICA

SUMMER 2016
EFFECTS OF FOREIGN EXCHANGE RISK ON FIRM VALUE IN THE
MANUFACTURING AND ALLIED SECTOR, A CASE OF DESBRO KENYA
LIMITED

BY

CHAUDHRY MOHAMED FIZAN

A Research Project Report Submitted to the Chandaria School of Business in Partial
Fulfilment of the Requirements for the Masters of Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY – AFRICA

SUMMER 2016
STUDENT’S DECLARATION
I, the undersigned, declare that this is my original research project and has not been
submitted to any other college, institution or university other than United States
International University.

Signed: ________________________ Date: __________________
Chaudhry Mohamed Fizan (ID NO. 630624)

This research project has been presented for examination with our approval as the
appointed supervisors.

Signed: ________________________ Date: __________________
KephaOyaro

Signed: ________________________ Date: __________________
Dean Chandaria School of Business

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COPYRIGHT
Copyright © 2016 Chaudhry Mohamed Fizan. All texts, graphics or other works are
copyrighted works of Chaudhry Mohamed Fizan. All rights reserved. No part of this
report may be reported or otherwise reproduced or transmitted in any form or by
electronic or mechanical means without prior permission or authority granted by the
author.

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ABSTRACT
This study’s main aim is to investigate the effects of foreign exchange risk on firm value
for the manufacturing and allied sector with specific objectives of analyzing the effects of
economic, transactions exposures and the effects of the CBK intervention on the firm
value.

This study reviewed theories in regards to the derived research questions. The study
examines the stake holder’s theory, contingency theory and also purchasing parity theory
all linked to the research questions. The study further goes on to examine the impacts of
the Kenyan central bank on the exchange rates. The foreign exchange risk management
strategies are also discussed in addition to the empirical review and knowledge gap.

The study was based on descriptive survey. The target population constituted 35
customers of the chosen firm. Respondents were identified through simple random
sampling. Primary data was collected using a combination of questionnaire and informal
interview to confirm the primary data collected. A fact sheet was used to summarize the
data collected before it is cleaned, coded and edited for completeness and accuracy before
being analyzed using the Statistical Package for Social Scientists (SPSS) to obtain
descriptive statistics. Data was presented using tables and figures.

The first specific objective of the study intended: to evaluate the effect of economic
exposure on firm value in the manufacturing and allied sector. The study revealed that the
majority respondents had a neutral feeling towards the questions asked under this section
and all the elements of the economic exposure and the value of the firm.

The second specific objective was: to evaluate the effect of transaction exposure on firm
value in the manufacturing and allied sector. The study revealed that the respondents
agreed with the questions asked under this section and all the elements of transaction
exposure, positively and significantly relate to the value of the firm.

The third specific objective was to evaluate to evaluate central banks interventions on
Kenyan shilling foreign exchange rate. The study revealed that the majority respondents
agreed with the questions asked under this section. Though it could be said that some
respondents were not in full agreement with all the questions, but the general agreement
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was in a positive direction in relation to central banks interventions on Kenyan shilling
foreign exchange rate.

The study concluded that only transaction exposure and the CBK intervention had a more
significant impact on the value of the firm while economic exposure had neutral view on
foreign exchange risk and firm value.

Since the study established that CBK intervention, transaction exposure and economic
exposures have a significant influence on the firm value; it can be recommended that
managers should concentrate their efforts towards allocating more funds to buying
foreign currencies in bulk for scheduled future transactions. This will help in increasing
profit and reducing exchange rate losses. The companies can employ methods that ensure
conservatism and ease of administration or more complex methods which attempt to
maximize results by taking on the additional risk.

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ACKNOWLEDGMENT
I would firstly wish to acknowledge and give a special thanks to Professor K. Oyaro for
his continuous guidance and support throughout my project. I would also wish to
acknowledge Desbro Kenya Limited for their Support and for accommodation during the
period I was conducting my research at their premises, and if it were not for them I would
not be writing this today. I would also like to thank the Almighty God for the strength and
support during this study as without the presence of God I would not be in the place I am
today. I would further like to thank my parents Shabaz and SaiqaChaudhry for the
continuous help and support throughout my studies as they were the pillars that made me
stand to where I am today.

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DEDICATION
Every challenging work needs self-effort as well as guidance of elders especially those
who were very close to our heart. And in light of this I would like to dedicate my project
to my parents Shabaz and Saiqa Chaudhry, who have made me the man I am today.
Through their continuous support, affection, love, encouragement and pray of day and
night make me able to achieve what I have. Through their presence in each step I have
made in life, I was able to reach the place I am now. So Mum and Dad I dedicate this to
you, Thanks for being the pillars that make me stand strong.

I would secondly like to dedicate this project to my daughter Inaaya Chaudhry, with her
smile and laughter I was able to overcome all the challenges that I came across ever since
she came into my life, she is my strength and the reason I want to do more with my life.
So I dedicate this to you Inaaya.

I also wish to dedicate this project to a man that has always guided me through life and
who has set an example for me, a man that has always been a huge part of my everyday
life, my grand-father Shaffi Chaudhry, “thanks for being a part of my life”.

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TABLE OF CONTENTS
STUDENT’S DECLARATION .......................................................................................... I
COPYRIGHT ...................................................................................................................... II
ABSTRACT ....................................................................................................................... III
ACKNOWLEDGMENT..................................................................................................... V
DEDICATION ................................................................................................................... VI
LIST OF TABLES .............................................................................................................. X
LIST OF FIGURES ......................................................................................................... XII
CHAPTER ONE ................................................................................................................ 1
1.0 INTRODUCTION .......................................................................................................... 1
1.1 Background of the Study ........................................................................................... 1
1.2 Problem Statement .................................................................................................... 8
1.3 General Objective ...................................................................................................... 9
1.4 Specific Research Objectives .................................................................................... 9
1.5 Significance ............................................................................................................. 10
1.6 Scope of the Study ................................................................................................... 10
1.7 Definition of terms .................................................................................................. 11
1.8 Chapter Summary .................................................................................................... 12
CHAPTER TWO ............................................................................................................. 13
2.0LITERATURE REVIEW ....................................................................................... 13
2.1 Introduction ............................................................................................................. 13
2.2 Effect of Economic Exposure on Firm Value in Manufacturing and Allied Sector 13
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2.3 The Influence of Transaction Exposure on Firm Value in Manufacturing and Allied
Sector .............................................................................................................................. 18
2.4 Evaluate central banks interventions on Kenyan shilling foreign exchange rate .... 23
2.5 Chapter Summary .................................................................................................... 28
CHAPTER THREE ......................................................................................................... 29
3.0 RESEARCH METHODOLOGY .......................................................................... 29
3.1 Introduction ............................................................................................................. 29
3.2 Research Design ...................................................................................................... 29
3.3 Population and Sampling Design ............................................................................ 29
3.4 Data Collection Methods ......................................................................................... 31
3.5 Research Procedures ................................................................................................ 32
3.6 Data Analysis Methods ........................................................................................... 32
3.7 Chapter Summary .................................................................................................... 33
CHAPTER FOUR ............................................................................................................ 34
4.0 RESULTS AND FINDINGS .................................................................................. 34
4.1 Introduction ............................................................................................................. 34
4.2 Response Rate ......................................................................................................... 34
4.3 Background Information ......................................................................................... 34
4.4 The Effect of Economic Exposure on Firms Value ................................................ 38
4.5 The Influence of Transaction Exposure on Firm Value .......................................... 48
4.6 Central Bank of Kenya’s Intervention on Foreign Exchange Rates ....................... 63
4.7 Chapter Summary .................................................................................................... 73

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