Question Tag: Business risk

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 20 Marks

AAA – Nov 2021 – L3 – Q2 – Advanced Audit Planning and Strategy

Evaluate internal and external business risks and outline pre-engagement activities for Sunsit Manufacturers Ltd.

The auditors of Sunsit Manufacturers Limited had disagreements with the company on various issues. This came to a climax with the withholding of a part of the payment of the last audit fees. The auditors had also been disenchanted with the undue pressures of management and have decided that, as a result of this and the withheld fees, they would disengage from the client.

The company’s chairman, in consideration of past issues, has considered the size of the audit firm as being partly responsible for its inability to manage adequately the pressures from the company’s accounting and management team. He has subsequently approached your firm for a change, and the partners have accepted the engagement despite the predecessor auditor’s declaration of the forfeiture of the firm’s outstanding fees and no further involvement with the client and issues relating to the company.

Required:

a. Following the background to the client and the engagement, evaluate the internal and external business risks that need to be considered with respect to the client. (10 Marks)

b. Discuss the pre-engagement activities to be carried on the client. (10 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – Nov 2021 – L3 – Q2 – Advanced Audit Planning and Strategy"

  • 20 Marks

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

The following draft appraisal of a proposed investment project has been prepared for the Finance Director of Keke Plc (KP) by a trainee accountant. The project is consistent with the current business operations of KP.

Year 1 2 3 4 5
Sales (units/yr) 250,000 400,000 500,000 250,000
Contribution (₦000) 13,300 21,280 26,600 13,300 –
Fixed costs (₦000) (5,300) (5,618) (5,955) (6,312) –
Depreciation (₦000) (4,375) (4,375) (4,375) (4,375) –
Interest payments (₦000) (2,000) (2,000) (2,000) (2,000) –
Taxable profit (₦000) 1,625 9,287 14,270 613
Taxation (₦000) – (488) (2,786) (4,281) (184)
Profit after tax (₦000) 1,625 8,799 11,484 (3,668) (184)
Scrap value (₦000) – – – 2,500 –
After-tax cash flows (₦000) 1,625 8,799 11,484 (1,168) (184)
Discount at 10% 0.909 0.826 0.751 0.683 0.621
Present values (₦000) 1,477 7,268 8,624 (798) (114)

Net present value = (16,457,000 – 20,000,000) = ₦3,543,000, so reject the project.

Additional Information:

  1. The initial investment is ₦20 million.
  2. Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year.
  3. Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year.
  4. Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year.
  5. ₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by annual charges to the project.
  6. Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year.
  7. Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year.
  8. The scrap value of machinery at the end of the four-year project is ₦2,500,000.
  9. The real weighted average cost of capital of Keke is 7% per year.
  10. The general rate of inflation is expected to be 4.7% per year.

Required:

a. Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
(4 Marks)

b. Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability.
(12 Marks)

c. Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:
i. An investment project has several internal rates of return;
ii. The business risk of an investment project is significantly different from the business risk of current operations.
(4 Marks)

(Total: 20 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques"

  • 20 Marks

CSME – May 2017 – L2 – SB – Q3 – Risk Management and Corporate Strategy

Explain business risk to a conservative investor and discuss strategies for risk control and monitoring.

Mallam Danladi is a civil servant who has won a sum of one hundred million Naira in a lottery. Being a very conservative person who is averse to risks, Mallam Danladi is contemplating putting the money in a fixed deposit account at an interest rate of 14% per annum or into treasury bills at an interest rate of 18.5% per annum. These two options are considered to be virtually risk-free. Mr. Madoff, a risk consultant, advised him to invest in the production of shea butter, coconut oil, and black soap, with a promise of 52% profit per annum. In an attempt to convince Mallam Danladi to invest in the production of these items, Mr. Madoff tried to educate him on the nature of risks and how to effectively monitor and control them in ways that will ensure that business remains highly profitable.

Required:

a. Explain briefly the nature of risk in business to Mallam Danladi. (2½ Marks)

b. Discuss FOUR distinct means of controlling business risk. (10 Marks)

c. Explain briefly the purpose of monitoring risks in business. (3 Marks)

d. Discuss THREE ways of monitoring risks in business. (4½ Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "CSME – May 2017 – L2 – SB – Q3 – Risk Management and Corporate Strategy"

Has Case Study
  • 10 Marks

SCS – Nov 2021 – L3 – Q6 – Identifying and Assessing Risk

Identify and assess four key business risks that COM faces and their impact on the company’s objectives.

The board has recognized that the company faces several business risks which, individually or together, could affect COM and its objectives and/or prospects. The board needs a briefing paper from the CEO on the current significant business risks that the company may be exposed to.

Required:
You are an Advisor to the CEO and he has asked you to prepare a briefing paper to be added to the board pack identifying and assessing the impact of FOUR (4) key business risks that COM must address in order to achieve its strategic objectives. Clearly identify the specific conditions giving rise to each key risk.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "SCS – Nov 2021 – L3 – Q6 – Identifying and Assessing Risk"

  • 3 Marks

AFM – May 2016 – L3 – Q4a – Hedging against financial risk: Non-derivative techniques, Economic environment for multinational

Outline three risk mitigation strategies that a company can adopt to reduce risks affecting profitability.

a) Booms and Bumps Limited has recently been registered as a multinational company dealing in the production and drilling of crude oil in the Oil and Gas industry. Due to uncertainties surrounding the future prospects of the industry, management has hired you as a financial consultant to conduct a risk assessment about the viability of the firm. In the course of the assessment, you constructed a risk register containing various risks that have the potential to affect negatively the profitability of the company.

Required:
Outline THREE basic strategies the management of the company can adopt to mitigate the impact of the risks. (3 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2016 – L3 – Q4a – Hedging against financial risk: Non-derivative techniques, Economic environment for multinational"

  • 10 Marks

FM – May 2020 – L2 – Q1b – Capital structure | Portfolio theory and the capital asset pricing model (CAPM)

Analyze the degree of operating and financial leverage for two subsidiary companies to determine the implications for their capital structure.

Firm A and Firm B are both subsidiary companies of Groupe Trojan Electronics. The directors of Groupe Trojan Electronics are reviewing the capital structure of the two subsidiary companies. You have been engaged to advise the directors on the appropriate capital structure for the subsidiaries.

You have obtained extracts from the financial results of the two companies for the past financial year and projection of the annual results for the current year, which is in its first quarter.

Required:

i) Compute the degree of operating leverage for each of the two companies. Based on the degree of operating leverage you obtain, advise the directors on the relative level of business risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

ii) Compute the degree of financial leverage for each of the two companies. Based on the degree of financial leverage you obtain, advise the directors on the relative level of financial risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2020 – L2 – Q1b – Capital structure | Portfolio theory and the capital asset pricing model (CAPM)"

  • 20 Marks

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

a) Understanding risk is key for a robust risk and control environment in modern business organisations.
Required:
In the light of the above, explain the following:
i) Systematic risk (2 marks)
ii) Business risk (2 marks)
iii) Financial risk (2 marks)

b) Quantum Investment Ltd in the past has been concentrating all its investments in one project that performed badly consistently over the past few years. They have therefore decided to adopt a diversification strategy by investing in projects A, B, and C. The table below presents the Net Present Value (NPV) of the projects under different states of the economy.

State of Economy Probability Project A Project B Project C
Bad 0.2 GH¢10 million GH¢12 million GH¢15 million
Average/Normal 0.5 GH¢20 million GH¢22 million GH¢30 million
Good 0.3 GH¢35 million GH¢40 million GH¢45 million

The company has GH¢200 million for investments in these three projects:
Project A = GH¢40 million
Project B = GH¢60 million
Project C = GH¢100 million

Required:
Compute the expected NPV for each of the three projects. (9 marks)

c) In capital structure decisions, there are two views of gearing and weighted average cost of capital (WACC): the traditional view and the Modigliani-Miller view.
Required:
Explain the two views with respect to gearing and WACC. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty"

  • 20 Marks

AAA – Nov 2021 – L3 – Q2 – Advanced Audit Planning and Strategy

Evaluate internal and external business risks and outline pre-engagement activities for Sunsit Manufacturers Ltd.

The auditors of Sunsit Manufacturers Limited had disagreements with the company on various issues. This came to a climax with the withholding of a part of the payment of the last audit fees. The auditors had also been disenchanted with the undue pressures of management and have decided that, as a result of this and the withheld fees, they would disengage from the client.

The company’s chairman, in consideration of past issues, has considered the size of the audit firm as being partly responsible for its inability to manage adequately the pressures from the company’s accounting and management team. He has subsequently approached your firm for a change, and the partners have accepted the engagement despite the predecessor auditor’s declaration of the forfeiture of the firm’s outstanding fees and no further involvement with the client and issues relating to the company.

Required:

a. Following the background to the client and the engagement, evaluate the internal and external business risks that need to be considered with respect to the client. (10 Marks)

b. Discuss the pre-engagement activities to be carried on the client. (10 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – Nov 2021 – L3 – Q2 – Advanced Audit Planning and Strategy"

  • 20 Marks

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

The following draft appraisal of a proposed investment project has been prepared for the Finance Director of Keke Plc (KP) by a trainee accountant. The project is consistent with the current business operations of KP.

Year 1 2 3 4 5
Sales (units/yr) 250,000 400,000 500,000 250,000
Contribution (₦000) 13,300 21,280 26,600 13,300 –
Fixed costs (₦000) (5,300) (5,618) (5,955) (6,312) –
Depreciation (₦000) (4,375) (4,375) (4,375) (4,375) –
Interest payments (₦000) (2,000) (2,000) (2,000) (2,000) –
Taxable profit (₦000) 1,625 9,287 14,270 613
Taxation (₦000) – (488) (2,786) (4,281) (184)
Profit after tax (₦000) 1,625 8,799 11,484 (3,668) (184)
Scrap value (₦000) – – – 2,500 –
After-tax cash flows (₦000) 1,625 8,799 11,484 (1,168) (184)
Discount at 10% 0.909 0.826 0.751 0.683 0.621
Present values (₦000) 1,477 7,268 8,624 (798) (114)

Net present value = (16,457,000 – 20,000,000) = ₦3,543,000, so reject the project.

Additional Information:

  1. The initial investment is ₦20 million.
  2. Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year.
  3. Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year.
  4. Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year.
  5. ₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by annual charges to the project.
  6. Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year.
  7. Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year.
  8. The scrap value of machinery at the end of the four-year project is ₦2,500,000.
  9. The real weighted average cost of capital of Keke is 7% per year.
  10. The general rate of inflation is expected to be 4.7% per year.

Required:

a. Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
(4 Marks)

b. Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability.
(12 Marks)

c. Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:
i. An investment project has several internal rates of return;
ii. The business risk of an investment project is significantly different from the business risk of current operations.
(4 Marks)

(Total: 20 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques"

  • 20 Marks

CSME – May 2017 – L2 – SB – Q3 – Risk Management and Corporate Strategy

Explain business risk to a conservative investor and discuss strategies for risk control and monitoring.

Mallam Danladi is a civil servant who has won a sum of one hundred million Naira in a lottery. Being a very conservative person who is averse to risks, Mallam Danladi is contemplating putting the money in a fixed deposit account at an interest rate of 14% per annum or into treasury bills at an interest rate of 18.5% per annum. These two options are considered to be virtually risk-free. Mr. Madoff, a risk consultant, advised him to invest in the production of shea butter, coconut oil, and black soap, with a promise of 52% profit per annum. In an attempt to convince Mallam Danladi to invest in the production of these items, Mr. Madoff tried to educate him on the nature of risks and how to effectively monitor and control them in ways that will ensure that business remains highly profitable.

Required:

a. Explain briefly the nature of risk in business to Mallam Danladi. (2½ Marks)

b. Discuss FOUR distinct means of controlling business risk. (10 Marks)

c. Explain briefly the purpose of monitoring risks in business. (3 Marks)

d. Discuss THREE ways of monitoring risks in business. (4½ Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "CSME – May 2017 – L2 – SB – Q3 – Risk Management and Corporate Strategy"

Has Case Study
  • 10 Marks

SCS – Nov 2021 – L3 – Q6 – Identifying and Assessing Risk

Identify and assess four key business risks that COM faces and their impact on the company’s objectives.

The board has recognized that the company faces several business risks which, individually or together, could affect COM and its objectives and/or prospects. The board needs a briefing paper from the CEO on the current significant business risks that the company may be exposed to.

Required:
You are an Advisor to the CEO and he has asked you to prepare a briefing paper to be added to the board pack identifying and assessing the impact of FOUR (4) key business risks that COM must address in order to achieve its strategic objectives. Clearly identify the specific conditions giving rise to each key risk.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "SCS – Nov 2021 – L3 – Q6 – Identifying and Assessing Risk"

  • 3 Marks

AFM – May 2016 – L3 – Q4a – Hedging against financial risk: Non-derivative techniques, Economic environment for multinational

Outline three risk mitigation strategies that a company can adopt to reduce risks affecting profitability.

a) Booms and Bumps Limited has recently been registered as a multinational company dealing in the production and drilling of crude oil in the Oil and Gas industry. Due to uncertainties surrounding the future prospects of the industry, management has hired you as a financial consultant to conduct a risk assessment about the viability of the firm. In the course of the assessment, you constructed a risk register containing various risks that have the potential to affect negatively the profitability of the company.

Required:
Outline THREE basic strategies the management of the company can adopt to mitigate the impact of the risks. (3 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AFM – May 2016 – L3 – Q4a – Hedging against financial risk: Non-derivative techniques, Economic environment for multinational"

  • 10 Marks

FM – May 2020 – L2 – Q1b – Capital structure | Portfolio theory and the capital asset pricing model (CAPM)

Analyze the degree of operating and financial leverage for two subsidiary companies to determine the implications for their capital structure.

Firm A and Firm B are both subsidiary companies of Groupe Trojan Electronics. The directors of Groupe Trojan Electronics are reviewing the capital structure of the two subsidiary companies. You have been engaged to advise the directors on the appropriate capital structure for the subsidiaries.

You have obtained extracts from the financial results of the two companies for the past financial year and projection of the annual results for the current year, which is in its first quarter.

Required:

i) Compute the degree of operating leverage for each of the two companies. Based on the degree of operating leverage you obtain, advise the directors on the relative level of business risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

ii) Compute the degree of financial leverage for each of the two companies. Based on the degree of financial leverage you obtain, advise the directors on the relative level of financial risk associated with the two subsidiaries and the implication of that for capital structure design. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2020 – L2 – Q1b – Capital structure | Portfolio theory and the capital asset pricing model (CAPM)"

  • 20 Marks

FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty

Explain systematic, business, and financial risk; compute expected NPV for projects; and discuss traditional and Modigliani-Miller views on gearing and WACC.

a) Understanding risk is key for a robust risk and control environment in modern business organisations.
Required:
In the light of the above, explain the following:
i) Systematic risk (2 marks)
ii) Business risk (2 marks)
iii) Financial risk (2 marks)

b) Quantum Investment Ltd in the past has been concentrating all its investments in one project that performed badly consistently over the past few years. They have therefore decided to adopt a diversification strategy by investing in projects A, B, and C. The table below presents the Net Present Value (NPV) of the projects under different states of the economy.

State of Economy Probability Project A Project B Project C
Bad 0.2 GH¢10 million GH¢12 million GH¢15 million
Average/Normal 0.5 GH¢20 million GH¢22 million GH¢30 million
Good 0.3 GH¢35 million GH¢40 million GH¢45 million

The company has GH¢200 million for investments in these three projects:
Project A = GH¢40 million
Project B = GH¢60 million
Project C = GH¢100 million

Required:
Compute the expected NPV for each of the three projects. (9 marks)

c) In capital structure decisions, there are two views of gearing and weighted average cost of capital (WACC): the traditional view and the Modigliani-Miller view.
Required:
Explain the two views with respect to gearing and WACC. (5 marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – Nov 2023 – L2 – Q4 – Capital structure | DCF: Risk and uncertainty"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope
error: Content is protected !!
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan