Risk Management and Financial Leverage Concepts

This assignment covers various finance-related topics such as asset depreciation, liquidity ratio, current ratio, debt-to-equity ratio, cash flow statement, and more. It also delves into risk management principles, including categorizing risks, addressing uncertainty, and transparent and inclusive processes.

Running Head: DIPLOMA IN FINANCE AND MORTGAGE BROKING
Finance

Diploma in finance and mortgage broking 1
Question 1
Part A
Ratio 2016 2017 Risk Grade
Current ratio 1.01 1.10 Low
Quick ratio 0.84 0.91 Moderate
Return on Equity 0.72 0.70 High
Return on Assets 0.33 0.38 Low
Debt to Equity 0.49 0.22 Low
Debt to Assets 0.54 0.46 Low
Leverage Ratio 0.54 0.46 Low
Interest Cover Ratio 8.50 10.59 Low
Debt servicing cover ratio 8.50 10.59 low
Part B
30-Jun-16 30-Jun-17
$ $
Net Profit before tax 32778 35825
Potential add backs
Interest 4372 3735
Depreciation 9000 7650
Amortisation 500 500
Directors' salaries 32000 35000
other non-cash items 0 0
extraordinary items 0 0
EBITDA 45872 46885
Taxation allowance 9833.4 10747.5
Available for Debt service 55705.4 57632.5
Interest Cover ratio
Proposed deductible interest
cost
Existing

Diploma in finance and mortgage broking 2
Bank overdraft 324 252
CM loan 2003.04 1016.55
Total proposed interest cost 2327.04 1268.55
Proposed interest cover 19.71 36.96
Debt service cover ratio
Existing overdraft 3600 2800
Existing loan repayments 12696 12696
Proposed loan repayments 12696 12696
Total commitment proposed 28992 28192
DSCR 1.92 2.04
Part C
From the above serviceability analysis, the interest cover ratio has been increased from 19.71
to 36.96. This implies that wholesale butchers has enough earnings to pay its interest cost.
Increase in the ratio shows that earnings of the company has increased and also its proposed
interest cost is reduced in year 2017. Similarly, DSCR has increased from 1.92 to 2.04 which
is also favourable for the company and involves low risk. This means that the company has
enough earnings to pay its debt. Moreover, the amount available for debt service has also
increased as compare to the total commitment.
Question 2
Part A- Trusts
Unit Trust: It is basically an organization that collects money from small investors and
invest it into shares and stock on behalf of them, under a trust deed. It is a form of a collective
investment.
Discretionary Trust: It is a type of trust where trustees can decide about how to utilize the
trust income or capital.
Hybrid Trust: it covers the elements of both unit trust and discretionary trust.
Discretionary Family Trust: it is a type of discretionary trust established for the purpose of
holding family assets or to run a family business through trust.

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Trustee: a person who holds and manages the assets or property owned by a trust for the
benefit of beneficiaries.
Difference between various types of trust:
Unit Trust Discretionary Trust Hybrid Trust Discretionary Family
Trust
A trust
established to
manage the funds
of small
investors.
A trust where the shares
hold by each beneficiary
is not fixed.
A combination
of unit and
discretionary
trust.
A trust formed for
managing the family
assets and business.
The trustee is
appointed by the
unit holders and
is obliged to
work as per the
trust deed. He is
personally liable
for the debts
incurred.
Under this, trustees are
held responsible for the
payments of income and
capital to the
beneficiaries. Moreover
they are obliged to work
according to the needs
of beneficiaries and
should keep a record of
their decisions.
A trustee has
both the
obligations of a
unit trust and
discretionary
trust
In a family trust, the
trustees are generally
the parents or a
company of which
they are the
shareholders. They
are obliged to
manage their assets
and conduct the trust.
Examples of when a trust is used:
 Unit trust is used at the time of making short term investment in a property or any
asset.
 When an individual wants to pass his or her wealth to the beneficiaries, discretionary
trust are used.
 Hybrid trust is a combination of unit and discretionary trusts. It is used at times when
tow group of individuals buy a property together.
 When an individual wants to start a family business through a trust, family trust is
been set up.
Part B- Company

Diploma in finance and mortgage broking 4
Legal requirements:
 Must have a registered office should inform to ASIC about its location.
 Personal details of all the directors should be provided to ASIC
 Keeping up to date, the financial records.
 At time of registration, company is required to pay a certain fees to ASIC.
 Inform ASIC about the changes in the business and also checking the accuracy
of annual statements.
Personal obligations of a director as per law is that he or she has to act in the best interest
of the company, avoid conflicts between personal interest and company’s interest, to protect
the company from being insolvent and to perform the duties with due care and diligence.
A person who is 18 years old and above and also ready to undertake the roles and
responsibility of a director.
In a proprietary company, at least one director is required and in public company, at least
three are required.
Question 3
Balance sheet: It reflects the balances of all the accounts prepared by the company during a
fiscal year. It represents the true and fair view of company’s profitability and financial
stability.
Profit and loss statement: The account shows all the incomes earned and expenses incurred
by a company. The net difference between these income and expenses is reported as a profit
or loss in the income statement.
Depreciation: it is a kind of expense charged on the life of an asset. It reduces the value of an
asset over the time and also known as a method of reallocating the cost of a tangible asset
over its life.
Liquidity Ratio: it is a ratio calculated for measuring the liquidity of the company. It shows
the ability of a company to pay its short term financial obligations with its current assets.
Current Ratio: it measures the portion of company’s Current assets against its current
liabilities. The ideal CR is 2:1 which implies that the value of business’s current assets should
be double of its current liabilities (Weil, Schipper & Francis, 2013).

Diploma in finance and mortgage broking 5
Debt to Equity Ratio: it is one of the financial leverage ratio which shows that how much of
the company’s assets are been financed through debt and how much are financed through
equity.
Cash flow Statement: A statement which shows the outflow and inflow of cash from
operating. Investing and financing activities.
Asset: an item owned by a business which has its own value and is used for paying debts or
legacies.
Liability: A financial debt or an obligation for a company, arises during the course of its
operations.
Net profit: The figure is determined by deducting all the operating expenses from the total
revenue earned by the business.
Equity: it is simply means ownership in the business. It is an accounting difference between
total liabilities and total assets.
As per Australian taxation, allowable expenses are travel expenses, gifts and donations,
interest, dividend, investment income, clothing expenses, home office expenses, tools and
equipment and other deductions for specific industries
Question 4
Commercial bank bill: a bill of exchange issued by a commercial bank for helping in raising
finance for the purpose of investment. For example, for purpose of financing the working
capital requirements, company borrows through bank bills.
Invoice or Factoring finance: it is a method for raising finance, used by the companies, in
which accounts receivables of the business are sold to a third party known as factor.
Chattel mortgage: It is a loan provided to the individual on a moveable property. For
example, business can raise finance for purchasing a heavy machinery by giving a security
interest in machinery to the seller. So in case of default, the seller can sell the machine to
recover the loss.
Equipment Finance: it is a loan used for purchasing or borrowing a physical asset for the
business. Method of financing are Equipment loan and equipment leasing.
Question 5

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Principle Outline of principle
Creates and protect
value
Through continuous review of risk management process and
system, agency’s objective can be easily achieved.
Integral part of
organization
processes.
This principle says that, risk management must integrate with the
framework of government and be a part of its planning process.
A part of decision
making
Risk management help the decision makers in selecting appropriate
option and also in identifying the priorities.
Addressing
uncertainty
Identification of potential risk, helps the agencies to implement
controls and treatment for minimising the chances of loss.
Systematic,
structured and
timely process
Risk management process should remain consistent across the
agency for ensuring efficiency and reliability of the results.
Transparent and
inclusive.
Stakeholder’s engagement in the risk management process implies
that proper communication and transparency is there in course of
identifying and analysing the risk (Australian Government. 2010).
Question 6
 In the process of risk management, it is very necessary to categorize the various risks
into a common area, as this will facilitate a structured and systematic approach in
identification of the risks.
 Risk categorization enables the management to enhance their focus on the wider
range of risks. Moreover, the managers can identify all the risk in a very systematic
and consistent manner.
 It makes the risk assessment easier as the categories enable the meeting and
interviews with the people who are familiar with a specific risk category.
 Categorization of the risk helps in greater controlling and monitoring the identified
risk classified under same area.