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FNS60215 Evaluate Business Risk and Performance Assignment
Risk management strategies are developed that optimize the mix of asset structures and liabilities in operations and ensures flexibility to meet changing environments.
Question 1: Briefly explain the three major functions of a financial manager? (2.5 Marks)
Question 2: Will the majority of businesses be positively or adversely affected by an increase in interest rates? Explain. (2.5 Marks)
Question 3: What forms of credit risk do small businesses face? How can they overcome these risks? (2.5 Marks)
Question 4: Outline the differences between enterprise-wide risk management and Traditional approach of risk management. (2.5 Marks)
Parchment Enterprises is considering an investment project that will cost $230,000. It has an economic life of 4 years with no expected scrap value. Depreciation will be charged at $40,000 each year and the tax rate is 30%.
a) Complete the following table: (4 Marks)
End of year
Operating cash inflows
Operating cash outflows
Net operating cash flow
Accounting profit before tax
Taxation expense 30%
Accounting profit after tax
Free cash flows (net operating cash flow less taxation)
b) Using a cost of capital of 10 %, calculate the project’s NPV. Is it a profitable project? (3 Marks)
c) Calculate the project’s NPV by using a cost of capital of 8% and 12%. Does your decision change when the cost of capital changes? (3 Marks)
Question 6: What is credit analysis? (1 Mark)
Question 7: Name 4 sources credit information. (1 Mark)
Question 8: What are 5 C’s of credit analysis? Briefly explain. (1 Mark)
Question 9: Identify two methods to manage interest rate risk. (2 Marks)
Question 10: Briefly explain Liquidity risk and its components. How can businesses attempt to assess these risks? (2 Marks)
Question 11: Nullabor Ltd. sells 9000 units of a product per year. The purchase price per unit is $5. Carrying costs are $2 per unit per annum and cost of placing each order is $40. (3 Marks)
a) Calculate the economic order quantity.
b) Calculate the number of orders to be placed during the year.
c) Calculate the total inventory cost per annum.
The following are the condensed Balance Sheets, Summary of Income Statements of three publicly listed companies, namely: Venus Ltd, Neptune Ltd and Pluto Ltd. Assume that all firms operate in the same industry. Additional financial details are also provided below.
Required: Calculate the following ratios for each company and comment on the financial structure, financial risks and relative profitability of each of them. (5 marks)
a) Current Ratio
b) Inventory Turnover ratio
c) Net profit margin
d) Total debt to total assets
e) Debt to equity
Question 13: Voltar Company manufactures and sells a telephone answering machine. The company’s contribution format income statement for the most recent year is given below:
a) Calculate degree of operating leverage at present level of sales. (2 Marks)
b) Assume that through a more intense effort by the sales staff the company's sales increase by 6% next year. By what percentage would you expect net operating income to increase? Use the operating leverage concept to obtain your answer. (2 Marks)
c) Calculate Degree of Financial leverage and interpret your answer. (2 Marks)
d) Calculate combined leverage for Voltar Company and interpret your answer. (2 Marks)
Question 14: Briefly describe 3 instruments for managing financial risk. (2 marks)
Question 15:Andy, the farmer is growing a crop of 10,000 nectarines that will be ready to sell in 3 months time. He feels that the price of nectarines today is very high and would love to be able to sell his nectarines at today’s price in 3 months. What type of financial instrument Mr. Andy can use in this situation? ( 3 marks)
Question 16: Outline the differences between options and forward contract? (2 marks)
Question 17:What is a swap contract? Explain with example. (1 mark)