Question
M/s.ABCSpinningMillsLimited,establishedin2003,isanunlistedfirm.Itsuppliestheginnerieswithcottonyarnandproducesconeyarn,primarilyusedbythepowerloomtextileindustry.CottonyarnisalsoexportedbythecompanytoneighboringcountriessuchasBangladesh,Nepal,andSriLanka.Intherespectivecurrenciesofsuchnations,thesalesbillsareraised. Thebusinessislocatedinatotalareaof45acres,20acresofwhicharevacant.Theyhaveafixeddeposit, TheBoardofDirectorsagreedtousethevacantlandandsurplusfundsefficientlyandtocreateanadditionalproductionunittoproducepolyesteryarnbytheendofMarch2020.TheBoardalsodiscussedthepossibilitythatpublicconcernscouldberesolved.Togothroughtheabovesuggestionsandprovidehisrecommendations,aconsultantwasnamed. Withthefollowingcomments/suggestions,theconsultantcameout: Theproductmixoftheproductionof70percentcottonyarnand30percentpolyesteryarnfrom1April2020wassuggested.Forcottonyarnandpolyesteryarn,theprojectedearningsbeforeinterestandtaxwillbe'2croresand'30lakhsforFY2020-21,respectively.Afteranalysingtheconsumerdemandforpolyesteryarn,theaboveproductmixwassuggested. Itwillcosttheprojectatotalof'30crores.A10-yeartermforbanks Completelyautomatedandcomputer-controllednewmachinerytobepurchasedfromaLondon-basedcompany.Aletterofcredit(unfunded)towardsthesameisrequiredbythecompany.Theaboveequipmentutilisesthelatesttechnologiesandisfocusedonmachinelearningthatisintuitive. Onthebasisofamarketreport,itwasnotedthatthepolyesteryarnwouldalsobepurchasedbyestablishedcustomers. At present, the pollution level was above the tolerable industry level, resulting in increased bronchitisproblems among the
M/s.ABCSpinningMillsLimited,establishedin2003,isanunlistedfirm.Itsuppliestheginnerieswithcottonyarnandproducesconeyarn,primarilyusedbythepowerloomtextileindustry.CottonyarnisalsoexportedbythecompanytoneighboringcountriessuchasBangladesh,Nepal,andSriLanka.Intherespectivecurrenciesofsuchnations,thesalesbillsareraised.
Thebusinessislocatedinatotalareaof45acres,20acresofwhicharevacant.Theyhaveafixeddeposit,
TheBoardofDirectorsagreedtousethevacantlandandsurplusfundsefficientlyandtocreateanadditionalproductionunittoproducepolyesteryarnbytheendofMarch2020.TheBoardalsodiscussedthepossibilitythatpublicconcernscouldberesolved.Togothroughtheabovesuggestionsandprovidehisrecommendations,aconsultantwasnamed.
Withthefollowingcomments/suggestions,theconsultantcameout:
Theproductmixoftheproductionof70percentcottonyarnand30percentpolyesteryarnfrom1April2020wassuggested.Forcottonyarnandpolyesteryarn,theprojectedearningsbeforeinterestandtaxwillbe'2croresand'30lakhsforFY2020-21,respectively.Afteranalysingtheconsumerdemandforpolyesteryarn,theaboveproductmixwassuggested.
Itwillcosttheprojectatotalof'30crores.A10-yeartermforbanks
Completelyautomatedandcomputer-controllednewmachinerytobepurchasedfromaLondon-basedcompany.Aletterofcredit(unfunded)towardsthesameisrequiredbythecompany.Theaboveequipmentutilisesthelatesttechnologiesandisfocusedonmachinelearningthatisintuitive.
Onthebasisofamarketreport,itwasnotedthatthepolyesteryarnwouldalsobepurchasedbyestablishedcustomers.
At present, the pollution level was above the tolerable industry level, resulting in increased bronchitisproblems among the workersand the company had spent an additional amountof ` 20 lakhs towards medical expenses of 48 workers. It was observed that workerswhowere affected did not wear the face masks regularly.
The roof of the stock storage facility did not haveproperagainstvariousweather conditions. The loss on account of the same was `10 lakhsduringthe FY 2018-19. Thecost of renovation of the facility is estimated to cost ` 1 crore. An additional loan, repayableat the end of one year, from bank to be obtained at an interest of 14%.
The company did not receive insurance compensation towards the additional amount spent on medical expenses and the stock loss incurred.
To provide a monthly advance of ` 10 lakhs to each of the eight agricultural co-operative societies, where the cotton growing farmers are members. Suchadvancewouldbeadjusted in the subsequent month against the purchases made fromtherespective societies.This step is taken toensure continuous supply and reduce the volatility in pricesof raw materials.
A new comprehensive ERP software to be installed covering both the existing and future operations.
The managers' in-charge failed to oversee the controls involved in the operations which resulted in control failures in various activities.
Theexchangeratehasfluctuated,leadingtoadeclineinprojectedsellingratesforexportsalestoforeigncountries.Fewforeignbuyersinagivencountryhavenotpaidtheirdues,citingviolenceintheircountry.
Duetorigidcompetition,thecompanyisforcedtosell,belowthecostprice,somevarietiesofyarnmade.Currentmachineryusedinproduction,whereroutinemaintenancehasnotbeenperformed,hasbeenshowntoinvolvereconditioninginordertoprovidebetterproductivity.
Ratherthantheabove-mentionedfindings,theconsultantrecommendeddiscussingtheabove-mentionedconcerns,determiningandreviewingtherisksposed,andthencontinuingwiththeplantoresolvethetopicofpublicconcern.Theboardofdirectorstooknoticeoftherisksandagreedtodiscussthemattheirlevelwithdueconsideration.
Youareexpectedtoassistthemanagementastheriskmanagementspecialistinaddressingthefollowingquestionsposedbythem.
Multiple Choice
Choose the correct answer in the following:
A software error, in the automated computer-controlled imported machinery, in case of raw material may lead to wasted production.
This would more LIKELY be called as:
- Operational Loss
- Business Disruption Loss
- Propagation Error Loss
- Program Error Loss
From the present and proposed operations of the companywhichof thefollowingis NOT an opportunity risk?
- purchase of new machinery
- diversifying into new products
- payment of purchase advance
- stiff competition faced by the company
The company's proposal for the new project wouldLEASTlikely tohave thespecificrisk of:
- error of estimation in resources and allocation
- completion of the project in scheduled time
- estimation of cash flows
- regulatory restrictions on industry
The determining of the risks thatmight impactthetimely completionof the projectwould be done MOSTLY as a part of:
- Risk Management Planning
- Risk Identification
- Quantitative Risk Analysis
- Qualitative Risk Analysis
The bank while appraising the proposal for the term loan would verify the stature of the directors with respect to the following, EXCEPT:
verify that the name of the directorappears in the listof defaultersby wayreference to his DIN
- use independent source of confirmation of identity of the director, in case of doubt
- verify the ability to infuse further capital by the directors for the expansion of business
- review of director's status as Politically Exposed Persons (PEPs)
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