Rquirement Finance In Business

Strategic Business Risk Assessment

One.Tel Case Strategic Business Risk Assessment, Inherent Risk Assessment and Preliminary Going Concern

Question 1

Assume the government wishes to reduce alcohol consumption by considering a higher excise tax on alcohol products. Collect information on estimates for the price elasticity of demand for alcohol products. Based on these elasticity estimates illustrate using a demand/supply diagram(s) who bears the burden of the higher excise tax, consumers or producers.

As an alternative for reducing alcohol consumption assume the government is also considering the imposition of a minimum price on alcohol products. Using a demand/supply diagram illustrate the consequences of imposing a minimum price on alcohol for the consumption of alcohol products.

Provide comment on the relative merits of increasing excise taxes compared to imposing a minimum price on alcohol products for reducing alcohol consumption.

Question 2 

  1. a)     Assume that in long-run equilibrium the minimum point of the LRAC curve for a table manufacturer’s tables in $200   per table. Under conditions of monopolistic competition, will the long-run price of a table be above $200, equal to $200 or less than $200. Explain your answer.
  1. b)     What are of the characteristics of an oligopolistic market? Give three examples of industries with oligopolistic firms in Australia. Justify your examples by relating them to the characteristics of oligopolistic firms.
  1. c)      What are the characteristics of a monopolistically competitive market? Give three examples of industries with monopolistically competitive firms in Australia. Justify your examples by relating them to the characteristics of monopolistically competitive firms.
  1. d)     Assume that two firms make up a natural duopoly. What are the conditions which may make this occur? Sketch the market demand curve and cost curves that describe the situation in this market and that prevent other firms from entering.

Assessment

Nature of the Entity’s Business

One.Tel was launched in Sydney, Australia in May 1995. They were described as a global telecommunications company offering a fully integrated product list including low-cost international and national calls, Internet services, prepaid and post paid calling cards plus GSM mobile phone services. Their strategies as customer-focused and dedicated to providing innovative, quality telecommunication services at reduced prices. Details of total revenue by geographic segment for the year ended 30 June 20001 are as follows:

Country

$M

%

Australia

429.4

64

UK

144.7

21

France

15.1

2

Netherlands

36.6

5

Hong Kong

39.2

6

Other

13.2

2

Total

678.2

The Industry

ESSAY ON CHALLENGES OF RACISM AND SEXISM FACEDAustralia’s telecommunications infrastructure with a fully digitised network is as sophisticated and as modern as any in the world. Land based phone lines penetrate about 96 per cent of all households, with 2 million Internet subscribers and over 7 million Internet users. Mobile phone services are well established in Australia with more than 8 million users or 42 per cent of the population, one of the highest user rates in the world. Telstra, Optus and Vodafone each operate separate GSM mobile networks. Telstra’s market share is around 57 per cent, Optus 31 per cent and Vodafone 11 per cent. (Source: US Department of State FY2001 Country Commercial Guide)

Prior to the deregulation of Australia’s telecommunications industry on 1 July 1997, there were two carriers. There are now 35 carriers who are often former service providers and are generally reliant upon leasing network capacity from Telstra, although some are developing their own switching and network capability.

The influx of smaller carriers into the telephony market has acted as one of the major developments in producing important competitive results in the deregulated market. These carriers typically provide international and long-distance calls and, more recently, complete telephony services. The

growth in revenue does not correspond directly with growth in the number of telecommunication service providers due to greater market competition, reduced prices, and lower revenue per company.

Telstra, the former monopoly carrier, is the dominant provider of Australia’s land-based ESSAY ON CHALLENGES OF RACISM AND SEXISM FACED (2)telephony service. This network has nearly 10 million connections and an annual growth rate of five per cent. Telstra still dominates the telecommunications environment although its market share has dropped significantly in recent years.

Mobile phone services are well established in Australia with more than 8 million users or 42 per cent of the population, one of the highest user rates in the world. Telstra, Optus and Vodafone each operate separate GSM mobile networks. Telstra’s market share is around 57 per cent, Optus 31 per cent, and Vodafone 11 per cent.

Management

The Board of One.Tel comprised nine members, including five non-executive directors and four executive directors. Due to the rapid growth of the industry described in the previous section significant managerial experience in the industry was limited. The functions of the board included:

i.approval of corporate strategy, and financial plans;

ii.identifying and addressing areas of significant risk facing the company;

iii.reviewing and monitoring management processes and reporting mechanisms;

iv.monitoring financial performance;

v.Appointment of the senior management team.2

Financial Statements3

BALANCE SHEETS AT 30 JUNE 2000

Consolidated

Parent Entity

Note

2000

1999

2000

1999

CURRENT ASSETS

$M

$M

$M

$M

Cash

25

335.7

172.6

164.2

170.8

Receivables

9

218.4

72.0

104.0

58.9

Inventories

10

5.1

2.5

4.5

1.8

Other

11

68.9

49.1

50.8

35.3

TOTAL CURRENT ASSETS

628.1

296.2

323.5

266.8

NON CURRENT ASSETS

Investments

12

26.0

17.1

Receivables

9

2.9

356.7

62.0

Plant and equipment

14

155.7

41.0

85.9

28.1

Intangibles

15

559.8

28.0

522.3

Other

11

91.9

157.9

71.1

132.3

TOTAL NON CURRENT ASSETS

807.4

229.8

1062.0

239.5

TOTAL ASSETS

1,435.5

526.0

1,385.5

506.3

CURRENT LIABILITIES

Accounts payable

16

277.2

73.0

115.5

50.4

Borrowings

17

92.2

7.2

20.2

7.2

Provisions

18

5.8

4.7

5.2

4.4

TOTAL CURRENT LIABILITIES

375.2

84.9

140.9

62.0

NON CURRENT LIABILITIES

Accounts payable

16

2.3

1.2

Borrowings

17

107.3

62.9

80.5

62.9

Provisions

18

8.2

15.2

8.1

14.6

TOTAL NON CURRENT LIABILITIES

115.5

78.1

90.9

78.7

TOTAL LIABILITIES

490.7

163.0

231.8

140.7

NET ASSETS

944.8

363.0

1,153.7

365.6

SHAREHOLDERS’ EQUITY

Share capital

19

1,225.6

355.6

1,225.6

355.6

Convertible notes

17

0.1

3.7

0.1

3.7

Retained profits/(accumulated losses)

(282.1)

9.1

(68.7)

9.6

Reserves

20

1.2

(5.4)

(3.3)

(3.3)

TOTAL SHAREHOLDERS’ EQUITY

944.8

363.0

1,153.7

365.6

FINANCIAL STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2000

Consolidated

Parent Entity

Note

2000

1999

2000

1999

$M

$M

$M

$M

CASH

FLOW

FROM

OPERATING

ACTIVITIES

Receipts from customers

510.9

300.1

283.3

250.2

Payments to suppliers and employees

(684.8)

(328.1)

(327.4)

(250.2)

Interest received

16.9

1.9

11.1

1.9

Interest and other borrowing costs paid

(11.9)

(3.5)

(7.5)

(3.5)

Income tax refunded

0.7

0.7

Net cash used by operating activities

25

(168.9)

(28.9)

(40.5)

(0.9)

CASH FLOW FROM INVESTING

ACTIVITIES

Proceeds from sale of investments

1.6

1.6

Proceeds from sale of plant and equipment

19.2

19.2

Payment for plant and equipment

(87.5)

(34.0)

(32.3)

(20.0)

Purchase of licences

(525.6)

(9.5)

(523.1)

Purchase of Controlled Entities

(6.9)

(6.9)

Payment of deferred consideration

(1.8)

(1.8)

Loans provided to wholly owned entities

(264.4)

(53.8)

Loans provided to other parties

(2.6)

(2.6)

Net cash used by investing activities

(614.9)

(32.2)

(821.6)

(62.5)

CASH FLOW FROM FINANCING

ACTIVITIES

Proceeds from issue of shares

818.5

280.3

818.5

280.3

Proceeds from borrowings

139.8

59.0

50.0

59.0

Finance lease principal repayments

(11.2)

(4.2)

(11.2)

(4.2)

Dividends paid

(1.8)

(2.5)

(1.8)

(2.5)

Share buy-back

(106.4)

(106.4)

Net cash provided by financing activities

945.3

226.2

855.5

226.2

Net increase in cash held

161.5

165.1

(6.6)

162.8

Cash and cash equivalents at beginning of year

172.6

8.4

170.8

8.0

Exchange rate adjustment

1.6

(0.9)

Cash and cash equivalents at end of year

25

335.7

172.6

164.2

170.8

PROFIT AND LOSS STATEMENTS FOR THE YEAR ENDED 30 JUNE 2000

Consolidated

Parent Entity

Note

2000

1999

2000

1999

$M

$M

$M

$M

Eamings/(loss) before depreciation,amortisation,

interest, abnormal items and income tax

(230.4)

25.2

(57.3)

24.7

Depreciation and amortisation

2

(35.3)

(12.3)

(26.6)

(9.8)

Net interest (expense)/revenue and other

borrowing costs

2

3.3

(1.6)

4.3

(1.6)

Operating profit/(loss) before abnormal items

and income tax

(262.4)

11.3

(79.6)

13.3

Abnormal items

4

(33.5)

(1.4)

(5.4)

(1.4)

Operating profit/(loss) before income tax

2

(295.9)

9.9

(85.0)

11.9

Income tax (expense)/benefit attributable to

operating profit/loss

3

4.8

(2.9)

6.8

(4.0)

Operating profit/(loss) after income tax

(291.1)

7.0

(78.2),

7.9

Retained profits at the beginning of the

financial year

9.1

5.1

9.6

4.7

Total available for appropriation

(282.0)

12.1

(68.6)

12.6

Dividends provided for or paid

7

0.1

3.0

0.1

3.0

Retained profits/(accumulated losses) at the end

of the financial year

(282.1)

9.1

(68.7)

9.6

Discussion Questions

1.List and discuss several factors that would have contributed to an increased inherent risk assessment at the financial report level. Also identify which of these factors may be identified during the strategic business risk assessment.

2.List and discuss several inherent risk factors that would have contributed to an increased inherent risk assessment at the account balance level.

3.Do you believe that the area of going concern should be assessed as high, medium or low? Identify the factors that are the basis for your decision.

David Marks

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