China Manipulation

2a

2b

Market Risk arises due to movement in prices of financial instrument. Movement in stock price

Liquidity Risk arises out of inability to execute transactions. Insufficient buyer and seller

Credit Risk arises when one fails to fulfill their obligations towards their counter parties. Foreign exchange

Operational Risk arises out of operational failures such as mismanagement or technical failures. lack of controls

Legal Risk arises out of legal constraints such as lawsuits.

2c business and financial risk based on product life cycle (10 marks)

During growth stage and launch stage, the business risk is high and financial risk is low therefore low risk source of funding should be use instead high risk funding. For example equity could be compensate the high business risk of the company. By using equity funding, the company will not have to pay dividend or choose to pay to the investor. The company cannot use debt funding because the cash flow is negative and not stable. If the company use debt funding, the company will have liquidity problem.

During the maturity stage, both financial and business risk are low as there are in a stable stage, as the cash flow is stable and positive.

During the decline stage, the business risk is low therefore high risk source of funding should be use instead low risk funding. For example debt funding could compensate low business risk. By using debt equity funding, the company can enjoy the tax shield. The company cannot use equity funding because they have too much of cash. If the company use equity funding, the company will have to pay more tax.

3a five features of startup-company (15 marks)

During the startup stage, the company with have high business risk such as product risk, market acceptance, market share, size of market maturity, length of maturity period, maintenance of market share and rate of eventual decline which may incur accounting losses or very nominal profits in its early years of operations.

At this stage, most of the company would use venture capital funding so the company will have low financial risk as cash flow is highly negative and new funds are needed for investment opportunities.  Thus debt financing at this stage provide little or no tax shield.  

Therefore, the company will no dividend payout to company’s investor due to the negative cash flow.

The company’s future growth prospect is expected to be very high because the customer’s expectation would be high on the new product that have launched

so the higher the future growth the higher the P/E ratio.

3b

Business angels are individuals have made money in their own enterprises and are seeking excitement and financial reward of investing in another’s business.  Business angels investment is more informal, documentation is much simpler and deal can be done more quickly due to individuals being satisfied with doing less due diligence   

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