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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 new $30 million loan would be recorded as a non-current liability on the company's balance sheet. This reflects the long-term obligation of the business to repay the loan. Meanwhile, the properties purchased with this loan would be recorded as non-current assets, representing the value of the physical resources owned by the business.
Step 2
Explain a financial risk associated with borrowing funds from the USA.
Answer
One significant financial risk associated with borrowing from the USA is exchange rate fluctuation. The Australian handbag business must consider the possibility that the Australian Dollar may depreciate against the US Dollar. If such a depreciation occurs, the business will face higher repayments than initially expected, as it would need to convert more Australian Dollars to meet its obligations. This could lead to increased interest expenses and reduced profitability, making the business less financially stable.