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QUESTION 1 (48 marks) Mother Nature Ltd. (Mother Nature) is a South African entity with a 28 Februaryfinancial year-end. The entity sells various fruits, vegetables,
QUESTION 1 (48 marks) Mother Nature Ltd. ("Mother Nature") is a South African entity with a 28 Februaryfinancial year-end. The entity sells various fruits, vegetables, lentils and other related products to the public. Qualifying customers are allowed to open a 40-day credit account for purchases up to a unique value-limit per customer. Due to the fact that Mother Nature trades with food items which are mainly considered necessities rather than luxuries, their operating risk is quite low with relatively small variations in their earnings before interest and tax ("EBIT") compared to other industries during difficult economic times. Mother Nature, consequently, generally opts to source their funds through debt rather than equity financing, as debt has a lower financing cost than equity and Mother Nature is likely to have the financial ability to meet these compulsory repayments when due. As a result, the entity's business risk is low. Upon closer inspection of the debt sources of finance, it was revealed that Mother Nature issued bonds with interest of 3.9% above the prime rate. Dates and oranges are two of Mother Nature's product lines, amongst others. The dates are imported from Jordan where they are grown abundantly by external suppliers. These suppliers on average allow for credit purchases of 60 days. The oranges are grown in South Africa at a relatively low cost. Due to this fact, and the plentifulness of them locally, Mother Nature exports a portion of their oranges to the Philippines. These Filipino customers are amongst Mother Nature's customers who qualify to purchase on credit and are therefore debtors of Mother Nature's. Required: Identify and explain to Mother Nature Ltd.'s management the financial risks that the entity is exposed to. Supplement your answer to them by detailing (explaining) two risk management approaches, per financial risk identified, that the entity could undertake. Present your advice in the following format: (48 marks)
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