Assignment
Question 1: In this exercise we are analysing some financial statements in preparation for completing a submission to a financier. The scenario is provided below and an income statement and balance sheet is then provided for Wholesale Butchers.
You will then have3 tasksto do:
A. Using the 2 financial statements provided for Wholesale Butchers Pty Ltd, calculate the ratios in the table provided and comment as to the risk using Low/Medium/High rating:
B. Complete the manual Serviceability Analysis for Wholesale Butchers Pty Ltd by inserting the figures into the table provided
C. List your comments on the outcome from your completed Serviceability Analysis as you would if presenting this in a submission to a lender.
Scenario:
Mr Brett Olsen has owned his wholesale butcher company "Wholesale Butchers" for the past four years. He is the sole director and shareholder of the company. The past six months has seen an influx in orders and, to keep up with demand, he requires another refrigerated van in order to maintain delivery standards and turnaround times to his respective buyers.
Mr Olsen is purchasing a second hand van, 1 year old, from RV Dealers for $55,000 and is considering a 5 year Chattel Mortgage (CM), with an interest rate of 9% and monthly repayments of $1,133.21. He has opted not to provide a deposit and is not seeking any balloon at the end of the loan term. As no deposit is to be applied, repayments will be monthly in advance.
Brett's only business debts are an overdraft with CBA with a limit of $25,000 and current balance of $2,800 and his CM with Esanda for his existing refrigerated van, monthly repayments $1,058 pm with 2 years remaining.
His financials for the financial years ending 2014 and 2015 are provided here for your perusal and assessment.
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Wholesale Butchers Pty Ltd
Income Statement
For the financial year ending 30 June 2015
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2014
$
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2015
$
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Sales
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509,250
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7,650
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Cost of Goods Sold
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305,550
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3,735
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Gross Profit
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203,700
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1,100
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Operating Expenses
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Advertising
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1,250
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1,300
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Depreciation
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9,000
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7,650
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Interest
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4,372
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3,735
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Office Equipment
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1,000
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1,100
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Rent
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29,100
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30,555
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Stationery
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800
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925
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Utilities
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25,000
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26,000
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Vehicle Expenses
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9,700
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10,185
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Wages/Staff
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48,500
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50,925
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Salaries
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32,000
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35,000
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Amortisation
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500
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500
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Total Operating Expenses
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161,222
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167,875
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Net Profit
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32,778
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35,825
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Wholesale Butchers Pty Ltd
Balance Sheet
For the financial year ending 30 June 2015
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2014
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2015
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$
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$
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Assets
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Current Assets Cash
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22,945
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25,078
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Receivables
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4,042
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4,244
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Stock on Hand
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5,596
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5,876
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(May be recorded as Inventory)
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Total Current Assets
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32,582
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35,197
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Non-Current Assets Plant and equipment
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24,000
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21,600
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Vehicles
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35,000
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29,750
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Other Non-Current Assets
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2,348
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2,574
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Intangibles (Formation Costs)
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6,250
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5,750
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Total Non-Current Assets
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67,598
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59,674
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Total Assets
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100,180
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94,871
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Liabilities
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Current Liabilities Creditors
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11,192
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11,752
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Overdraft CBA (Limit $25,000)
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3,600
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2,800
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CM Esanda Current Portion ($1058x12)
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12,696
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12,696
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Provisions Employees
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4,042
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4,244
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Other
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598
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637
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Total Current Liabilities
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32,128
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32,129
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Non-Current Liabilities CM Esanda Long Term Portion
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22,256
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11,295
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Total Non-Current Liabilities
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22,256
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11,295
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Total Liabilities and Provisions
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54,384
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43,424
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Net Assets
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45,796
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51,448
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Part A- Using the financial statements provided - Wholesale Butchers Pty Ltd - you should fill in the table below by calculating the ratios in the 2014 and 2015 columns and in the Risk Grade column comment as to the risk using the grading of LOW, MODERATE or HIGH.
You should also make comments/notes on your analysis.
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RATIO
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2014
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2015
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Risk Grade
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1. Current Ratio
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2. Quick Ratio (Acid Test)
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3. Return on Equity (ROE)
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4. Return on Assets (ROA)
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5. Debt to Equity Ratio
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6. Debt to Assets Ratio
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7. Leverage Ratio
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8. Interest Cover Ratio (ICR) - Existing Debt
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9. Debt Servicing Cover Ratio (DSCR) - Existing Debt
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Part B. Using the financial statements provided - Wholesale Butchers Pty Ltd - complete the serviceability analysis below.
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30 June 20
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30 June 20
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Values in $000
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Values in $000
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Net Profit Before Tax(Note 1)
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Potential Add Backs
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Interest
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Depreciation / Amortisation (Note 2)
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Directors Salaries / Superannuation (Note 3)
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Other non-cash items
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Extraordinary / Non recurring expenses (may be Plus or Minus) (Note 4)
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Earnings Before Interest, Taxation, Depreciation, and Amortisation (EBITDA)
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Taxation allowance (Note 5)**
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Available for Debt Service
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Interest Cover Ratio
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Proposed Deductible Interest Costs:
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Existing $ k @ % *
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Plus Proposed $ k @ %*
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Total Proposed Interest Costs
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Proposed Interest Cover(Note 6) (EBITDA divided by Proposed Interest Cost)
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Debt Service Cover Ratio
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Existing O/D or Credit Card assumed fully drawn at prevailing interest rate interest only*
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Existing Loan Repayments
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Proposed Loan Repayments
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Total Commitment Proposed
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DSCR(Note 7)(Available for Debt Service divided by Total Commitment Proposed)
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Part C. Complete comments on the outcome from the Serviceability Analysis, as you would if presenting this in a submission to the financier.
Wholesale Butchers Pty Ltd - Serviceability Analysis Comments Comments may include but are not limited to:
Question 2: Please research the Internet (eg. Google) on the subjects below and review the course material, then provide comprehensive answers to the following:
A Trusts
• What is a Unit Trust?
• What is a Discretionary Trust?
• What is a Hybrid Trust?
• What is a Discretionary Family Trust?
• What is a Trustee?
• Define the differences of each type of Trust, including the obligation/s of the Trustee
• Provide an example of when each type of Trust would be used.
B Company
• What are the legal requirements of a company?
• What are the personal obligations of directors by law (please summarise)?
• Can anyone be a director of a company?
• What is the minimum number of directors required?
Question 3: From your research activities please provide answers to the following (from a Financial Accounting perspective)
• What is a Balance sheet?
• What is a Profit and Loss statement?
• What is Depreciation?
• What is Liquidity Ratio?
• What is Current Ratio?
• What is Debt to Equity Ratio?
• What is a Cashflow Statement?
• What is an Asset?
• What is Liability?
• How is a Net Profit determined?
• How would you define Equity?
• Under Australian taxation conditions, what are allowable expenses (provide 3 acceptable examples)?
Question 4: From your research activities please provide a definition of the following products and give examples:
• Commercial Bank Bill
• Invoice or Factoring Finance
• Chattel Mortgage
• Asset Finance product or Equipment Finance
Question 5: In the Australian Standard AS/NZS ISO 31000:2009 there are 11 Principles of Risk Management. List 6 of them and briefly state what each one is about.
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Principle
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Outline of Principle
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Question 6: There are many ways that an Industry Analysis can be completed. We have provided a sample below of a simple process to categorise the overall risk of any business/industry that you may choose to analyse. Please review the entries on the table below. To simplify the process some factors have been grouped together to alleviate any overlap of impact.
Task: In approximately 200 words, explain why you believe it is necessary to categorise risks
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Industry Risk Factor
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Low Risk
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Moderate Risk
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High Risk
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Life Cycle
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Mature Industry
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Mature or Saturated
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Decline or Introductory
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Social/Demographic
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Stable trends
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Unstable trends
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Very unstable - strong trend impact
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Cost Structure
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Lower Fixed costs -
Higher Variable Costs
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Fixed Costs Higher than Variable
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Very High Fixed Costs, Very Low Variable Costs
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EconomicEnvironment
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Not impacted by Business Cycle
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Some impact by Business Cycle
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Heavily impacted by Business Cycle
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PoliticalEnvironment
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None to little influence, some regulation
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Some to heavy, Influenced by regulation
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Strong Influence - heavily regulated
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Buyer Impact
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Many Buyers
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Fewer Buyers
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Few buyers, large search effort, high budget required
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Supplier Impact
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Many Suppliers
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Limited or Few Suppliers
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Dependent on one or few, large input value
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Threat of New Entrant
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High barriers to entrant.
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Lower start up costs, access to market
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No new entrant barriers- very low costs
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Threat of Substitute Product/Service
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No Substitution
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Some substitutes -
low cost to switch
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High level of substitutes no switching costs
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