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Business venture to enter the UK supermarket market - Coursework Example
Pages 7 (1757 words)
The grocery industry in the UK forms an integral part of the aggregate consumer spending and was valued at £156.8 billion in 2011 (IGD, 2012), an increase of 3.8% year -on-year. The growth of this industry over the years can be seen in Appendix One…
As mentioned above, the payback period for the loan exceeds the maximum tenor available.
As a possible solution, the company can enter into a loan guarantee contract, whereby repayments are guaranteed by a third party. There will be a commission charged for this service, but provided that the company might be in need of future term loan arrangements, it is imperative that the loan repayments are made on schedule to avoid a negative impact on the company's credit history.
Following upon the risk of taking out a loan to finance the business venture, there is the possibility of interest rate risk affecting the project. Given the uncertain and volatile nature of the current financial markets, changes in interest rates can affect the mark up payments the company will have to make, inadvertently affecting the cost of capital of the company.
One way to offset this risk includes taking out a call option on the interest rate. This option will effectively put an upper cap on interest rate volatility and going forward will limit the losses accruing to the company resulting from a sudden rise in interest rates.
Asdy will be operating in an industry which is highly susceptible to inflation risk, or risk owing to the rise in prices of retail products. Unexpected increase in inflation can have an impact on the dynamics of the UK consumer spending and affect the future cash inflows for the company.
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