Problem
Suria Dungun Sdn Bhd (Suria) is a manufacturer of hardware and devices that are widely used in the local telecommunication industry. Although the company has only been operating for about 5 years, its products are in great demand in the market. To boost sales in the short term, Suria adopted a loose credit system where long credit periods are given to customers. These credit terms are much longer than those offered by Suria's competitors, which contributes to a significant increase in sales. However, the long credit periods caused a lot of arrears in the account receivables. This policy is continued because the company believes in the ability of customers to pay their debts.
To meet the ever-increasing demand, the company plans to increase production capacity by purchasing new machines. The company intends to finance the purchase of new machines through a bank loan. The company's debt to equity ratio is currently at 60% and the board of directors believed that the company could repay the loan although this new loan will cause the company's debt-equity ratio to increase to 75%. The recent significant increase in interest rates is not a concern as they believe with the increase in profits, they can afford to pay high interest.
Suria relies heavily on a major supplier to supply the raw materials. The raw materials contain a highly toxic, expensive chemical which is currently in scarce supply across the world. The supplier has developed a great deal of expertise in handling toxic chemical and keeping waste to a minimum. However, there have been the allegation that the supplier's operation activities have polluted a nearby river. There are also rumors that the supplier does not provide adequate safety requirement for staff working with chemicals. The supplier has informed Suria that price rises may occur since safe storage, or the chemical is becoming more expensive.
Task
a) Explain THREE financial risks and TWO business risks associated with Suria Dungun Sdn Bhd local business operations.
b) Assess FIVE major risks in international business operations that Suria will be exposed to if it wants to expand its operation in a foreign country. International business operation risks should be mutually independent of the local financial and business risks identified in question.