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A luxury Australian handbag business is going to expand - HSC - SSCE Business Studies - Question 22 - 2021 - Paper 1
Question 22
A luxury Australian handbag business is going to expand. They intend to borrow 30 million US dollars to buy several new retail properties across Australia. (a) Iden... show full transcript
Worked Solution & Example Answer:A luxury Australian handbag business is going to expand - HSC - SSCE Business Studies - Question 22 - 2021 - Paper 1
Step 1
Identify where the business could record the loan and the properties on its balance sheet.
Answer
The loan of $30 million would be recorded as a non-current liability on the company's balance sheet. This is because it is expected to be paid back over a period longer than one year.
The properties acquired using this loan would be recorded as non-current assets on the balance sheet, reflecting the long-term investment the business is making in its expansion.
Step 2
Explain a financial risk associated with borrowing funds from the USA.
Answer
One significant financial risk associated with borrowing funds from the USA is the fluctuation in exchange rates. If the Australian Dollar depreciates against the US Dollar after the loan is taken, the business may face higher repayment costs.
For instance, if the Australian Dollar falls in value, the $30 million loan obligation may translate to a larger amount in AUD due to unfavorable exchange rates. This could lead to increased expenses, impacting the overall profitability and cash flow of the business, thereby posing a risk to its financial stability.