Exchange Rates and the Profitability of Manufacturing Industries in Uganada A Case Study of Mukwano Industries Limited

TABLE OF CONTENTS

DECLARATION

APPROVAL

DEDICATION •

ACKNOWLEDGEMENT

LIST OF ABBREVIATIONS AND ACRONYMS

ABSTRACT

CHAPTER ONE • 1

INTRODUCTION 1

1.0 Introduction 1

1.1 Background to the Study 1

1.1.2 Theoretical Background 3

1.1.3 Conceptual Background 3

1.1.3 Contextual Background 3

1.2 Problem Statement 3

1.3 Purpose of the Study 4

1.4 specific Study Objectives 4

1.5 Research Questions 4

1.6 Scope of the Study 4

1.6.1 Subject Scope 4

1.6.2 Geographical Scope 5

1.6.3 Time Scope 5

1.6.4 Significance of the Study 5

1 .7.Conceptual framework 6

CHAPTER TWO 8

LITERATURE REVIEW 8

2.1 Introduction 8

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2.1.1 Foreign Exchange Fluctuations .8

2.1.2 Brief History of Foreign Exchange 8

2.2. Theoretical Review 9

2.1.3 Participants of a Foreign Exchange Market 10

2.2 Causes of Exchange Rate Fluctuations 11

2.2.1 Economic Fundamentals i 1

2.2.2 Flight to Safety 12

2.2.3 Balance of Payments (BOP) 12

2.2.4 Political Developments 12

2.2.5 Government Policy 13

2.2.6 Speculation 13

2.2.7 Market Sentiment 13

2.2.8 Relative Inflation Rates 14

2.2.9 Exchange Rate Policy and Intervention 14

2.3 Profitability of Manufacturing Industries 15

2.3.1 Profitability Indicators 15

2.3.2 Gross Profit Margin Percentage 15

2.3.3 Return on Capital Employed (ROCE) 15

2.3.4 Gross Profit Margin Ratio 15

2.3.5 Factors Affecting Profitability of Business Organizations 16

2.3.6 Degree of Competition of a Firm 17

2.3.7 Strength of Demand 17

2.3.8 State of the Company 17

2.3.9 Availability of Substitutes 18

2.3.10 Degree of Costs 18

2.3.11 Price Discrimination 18

2.4 The Relationship between Exchange Rates and Profitability 19

2.6 Conclusions 20

VI

CHAPTER THREE .21

METHODOLGY 21

3.0 Introduction 21

3.1 Research design 21

3.2 Population 21

3.3 Sampling techniques 21

3.4Sarnple size 21

3.5 Data Sources 22

3.5.1 Primary Sources 22

3.5.2 Secondary Sources 22

3.6 Data Collection Methods 22

3.6.1 Observation 22

3.7 Instruments of Data Collection 22

3.7.1 Questionnaire 23

3.7.2 Secondary Data Collection Instruments 23

3.8 Data Processing, Analysis and Presentation 23

3.8.1 Data Processing 23

3.8.2Data analysis 23

3.8.3 Data presentation 23

3.9 Reliability and Validity of the Instruments 24

3.9.1 Reliability 24

3.9.2 Validity 24

3.1.0 Limitations of the Study 24

CHAPTER FOUR 25

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS 25

4.0 Introduction 25

4.1 Demographic Characteristics of Respondents 25

Table 4.1.1 Sex of respondents 25

VIII

Table 4.1.2 Age of respondents .25

Table4. 1.3: Religion of Respondents 26

Table 4.1.4 Marital status 26

Table 4.1.5 Period of stay with Mukwano industries limited 26

4.2 Foreign Exchange Rate Fluctuations 27

Table 4.2.1 Predictability of Uganda shilling against dollar 27

Table 4.2.2 Reasons for unpredictability of Uganda shilling against dollar 27

Figure 4.1 Fluctuation of Uganda Shilling Against the Dollar 28

Table 4.2.3 Reasons for the Shilling Fluctuation against a Dollar 28

Table 4.2.4 Causes of Exchange Rate Fluctuations 29

4.3 Level of Profitability of Mukwano Industries Limited 30

Table 4.3.1 Measuring Profitability in Mukwano Industries Limited 30

Table 4.3.2 Factors that affect the Profitability of Mukwano Industries Limited 30

Table 4.3.3 Consistency of Profitability in Mukwano Industries Limited 31

Table 4.3.4 Reasons for the Inconsistency of Profitability in Mukwano Industries Limited 31

Table 4.3.5 Other Factors that affect the Profitability of Mukwano Industries Limited.32

4.4 Relationship Between Exchange Rates and the Profitability of Mukwano Industries limited 33

Table 4.4.1 ANOVA table showing whether there is a relationship between exchange rates and profitability of manufacturing industries 33

Table 4.4.2 Correlation Analysis 33

4.4.2 Regression analysis 34

Table 4.4.3 Regression Analysis 34

Table 4.4.4 How Exchange Fluctuations affect Profitability of Mukwano industries Limited 34

CHAPTER FIVE 36

SUMMARY OF FINDINGS, CONCLUSION, RECOMMENDATIONS AND AREAS FOR FURTHER STUDY 36

5.0 Introduction 36 ix

5.1 Summary of Study Findings .36

5.1.1 Findings on Causes of Foreign Exchange Rate Fluctuations 36

5.1.2 Findings on Determinants ofProfitability in Mukwano Industries limited 37

5.2.3 Findings on the Relationship Between Foreign Exchange Fluctuations and Profitability of Mukwano Industries limited Limited 37

5.3 Conclusion 38

5.4 Recommendations 38

5.5 Areas for further research 39

REFERENCES 40

QUESTIONNAIRE FOR EMPLOYEES 42

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ABSTRACT

The purpose of the study was to establish the effect of foreign exchange rates on profitability of manufacturing industries a case study of Mukwano Industries Ltd and the specific objectives were to find out the causes of foreign exchange rate fluctuations, establish the determinants of profitability and establish the relationship between foreign rate and profitability of Mukwano Industries limited. The research design that was used in carrying out this research was a cross sectional research design which involved a descriptive research design. The population of the study included the employees of Mukwano Industries Ltd, 80 respondents were selected using purposive sampling design. Data was collected using primary and secondary source. The findings revealed that differentials in interest rates, terms of trade and high level of inflation cause exchange rate fluctuations, sales volume determine the profitability levels of the company and that profitability of the export company is dependent on foreign exchange fluctuations which implies that unfavorable fluctuations affect profits negatively whereas favorable fluctuations affect profits positively. It is concluded that, exchange fluctuations are related to the profitability of the company and unfavorable fluctuations affect profits negatively whereas favorable fluctuations affect profits positively The study recommended that investors should have some understanding of how currency values and exchange rates play an important role in the rate of return on their investments. More so, manufacturing companies need to adopt and start using a ‘Forward Contract’ to reduce the effect of fluctuations on their businesses.