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Speedy Scooters Pty Ltd plans to expand overseas - HSC - SSCE Business Studies - Question 24 - 2001 - Paper 1
Question 24
Speedy Scooters Pty Ltd plans to expand overseas. Its current performance indicators are: - retained profits $2 million - debt to equity ratio 0.5 : 1 - Australian... show full transcript
Worked Solution & Example Answer:Speedy Scooters Pty Ltd plans to expand overseas - HSC - SSCE Business Studies - Question 24 - 2001 - Paper 1
Step 1
Outline TWO methods of international expansion that might be used by this business.
Answer
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Exporting: This method involves Speedy Scooters Pty Ltd selling its products directly to foreign markets. It is often a cost-effective way to enter new markets without significant investment in foreign operations.
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Foreign Direct Investment (FDI): This involves the company establishing a presence in another country through facilities such as manufacturing plants or sales offices. This method allows greater control over operations but entails higher risk and investment.
Step 2
Analyse the impact of ONE internal and ONE external source of funds on the performance indicators of Speedy Scooters Pty Ltd.
Answer
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Internal Source - Retained Profits: The retained profits of $2 million represent a source of funding that can be reinvested into the business. This would enhance the cash flow available for expansion activities without increasing debt levels, positively impacting the debt to equity ratio.
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External Source - Loans: If Speedy Scooters Pty Ltd takes out a loan, it may provide immediate capital for expansion. However, this will also increase liabilities, which can negatively impact the debt to equity ratio, and obligations to repay could restrict cash flow.
Step 3
Assess the possible impacts of currency fluctuations on the plans of Speedy Scooters Pty Ltd for overseas expansion.
Answer
Currency fluctuations can significantly affect international operations. A stronger Australian dollar may render exports more expensive and less competitive abroad, potentially reducing market share in foreign countries. Conversely, a weaker dollar could lower costs for foreign customers, increasing competitiveness. Moreover, currency volatility can complicate financial planning, affecting profitability and pricing strategies. Speedy Scooters Pty Ltd will need to account for these fluctuations in its strategic planning to mitigate risks associated with currency exchange.