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John Doe has recently been appointed as Chief Risk Officer for Tutale(pty) Ltd

1. John Doe has recently been appointed as Chief Risk Officer for Tutale(pty) Ltd, however, John realised that the company rely heavily on fixed-interest bearing debt for financing, moreover,the rare earth stone business may not be sustainable in the long run.Kindly advice John on what to advice management on the financial and business risk for Tutule(pty)Ltd.

2. Mr.Reg (a well known entrepreneur) was offered an investment oppertunity which needed an initial outlay of $5000.It was expected that this investment will yield a return of $1000 per annum for the next ten years.

The cost of capital is estimated to be 15%

Mr. Reg requested you to evaluate this opportunity by determining

a) The net present value (NPV)
b) The discount pay-back period
c) And to advise him whether to invest or not

Solution Preview

Financial risk pertains to the risk of using fixed interest denominated debt. Operatin risk or leverage refers to risk caused due to high fixed operating costs such as rent. Operating leverage measures a firm's fixed versus variable costs. The greater proportion of fixed costs, the greater the operating leverage. Like financial leverage, operating leverage magnifies results, making gains look better and losses look ...

Solution Summary

The expert examines a company relying heavily on fixed-interest bearing debt for financing. The sustainability in the long run is provided.

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