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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 involves selling goods produced in Australia to customers in other countries. This method is less risky and requires fewer initial investments compared to establishing operations abroad. Speedy Scooters can tap into new markets and increase its sales overseas.
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Foreign Direct Investment (FDI): This method involves investing directly in facilities to produce or market a product in another country. It requires significant capital and long-term commitment but allows Speedy Scooters to have greater control over its business operations and potentially higher returns on 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: Retained profits of $2 million can be utilized for reinvestment into the business. This boosts the company's capital without incurring additional debt. Increasing retained earnings can positively impact the debt to equity ratio, as it shows a strong self-financed growth.
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External Source – Loans: Obtaining funds through loans can provide the necessary capital for expansion initiatives. However, this increases the company’s liabilities, consequently affecting the debt to equity ratio. An increase in debt might imply higher risk, but could also lead to increased profitability if effectively invested.
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 influence the cost structure and profitability of overseas operations for Speedy Scooters. A stronger Australian dollar may make exports more expensive and less competitive in international markets, potentially reducing market share abroad. Conversely, if the Australian dollar weakens, it could lower the costs of importing goods, enhancing competitiveness. Additionally, currency risks need to be managed through strategic planning, such as hedging or diversifying currency exposure, to mitigate adverse financial impacts.