Экзаменационный билет № 2 Student A

1. Read the background information given below and answer the questions:

Managing economic and financial risk: Unilever Case Study

Profile: Unilever
Unilever is one of the world’s largest corporations. It is Anglo\Dutch consumer goods multinational with
a turnover of 40 billion euro and 163,000 employees worldwide. Its main brands are market leaders in
three main sectors: food, homecare (washing powders, cleaning products, etc.) and personal care (soaps
and shampoos, etc.). Many of its products require raw material commodity ingredients (such as sugar,
coffee and wheat) that can be in short supply and can change sharply in price. It has operations in 170
countries, with more than half its sales coming from developing and emerging markets in Asia, Africa,
Latin America and Central and Eastern Europe. This is presently its fastest-growing geographical market
by far.

The following text is an extract titled “Outlook and risks” from a recent annual report from Unilever,
written at a time of a global economic downturn. The report sets out the possible risks facing the
company in the year ahead and what they propose to manage these risks.
Description of risk What we are doing to manage the risk
Economic
Decline in business during an economic downturn
Unilever’s business is dependent on continuing The breadth of Unilever’s brand portfolio and our
consumer demand for our brands. Reduced geographic reach can help to mitigate local
consumer wealth driven by adverse economic economic risks. We carefully monitor economic
conditions may result in our consumers becoming indicators and regularly model the impact of
unwilling or unable to purchase our products, different economic scenarios. We monitor
which could adversely affect our cash flow, consumer behavior through regular market research
turnover, profits and profit margins. In addition we and adopt a flexible business model which allows
have a large number of global brands, some of us to adapt our portfolio and respond quickly to
which have a significant value as intangible assets: develop new offerings that suit consumers’ and
adverse economic conditions may require us to customers’ changing needs during economic
impair the brands’ balance sheet value. downturns.

Avoiding customer and supplier default

During economic downturns there could be
constrained access to credit. This could impact the
viability of our customers and suppliers and could
temporarily inhibit the flow of day-to-day cash
transactions with suppliers and customers via the
banks.
Operations
Securing raw materials
Our ability to make products is dependent on
securing timely and cost-effective supplies of
production materials, some of which are globally
traded commodities. There are constant changes in
commodity prices according to global economic
conditions, which can have a significant impact on
our product costs.
Financial
Funding the ongoing operation of the business
As a global organization Unilever’s assets value,
earnings and cash flows are influenced by a wide
variety of currencies, interest rates, tax jurisdictions
We regularly monitor and review the health of our
customers and suppliers and implement credit
limits. These reviews are undertaken more
frequently during economic downturns.
We have strategies and policies in place to monitor
short-and long-term raw material demand forecasts.
We have contingency plans to enable us to secure
alternative key material supplies at short notice, to
transfer/share production between manufacturing
sites and to use substitute materials in our product
formulations and recipes.
A key target for the Group is to manage our
financial affairs so as to maintain our A1/A + credit
rating, which gives us continued access to the
 and differing taxes. If we are unable to manage our global debts markets, even when the overall
exposures to any one, or a combination, of these financial markets are under stress. We regularly
factors, this could adversely impact our cash flow, update cash flow forecasts and assess the range of
profits and/or profit margins. A significant shortfall volatility due to interest rates and currencies.
in net cash flow could undermine the company’s
credit rating, impair investor confidence and hinder
our ability to raise funds.

Managing interest rate differences and movements

We are exposed to market interest rate fluctuations In order to minimize interest costs and reduce
on our floating rate debt. This could increase the volatility our interest rate management policy aims
interest cost of our floating rate debt and increase to achieve an appropriate balance between fixed
the cost of future borrowings. and floating rate interest exposures on forecast net
debt levels for the next five years.
Managing currency fluctuations
Because of the breadth of our international In order to manage currency exposures we maintain
operations we are subject to risks from to relative a policy whereby operating companies manage
value of currencies which can fluctuate widely and trading and financial foreign exchange exposures
could have a significant impact on our assets, cash within prescribed limits and by the use of forward
flow, turnover, profits and /or profit margins. foreign exchange contracts.
1) How does Unilever’s range of brands and geographic markets protect it from local risks?
2) Why is it important for Unilever to keep its A1/A+ credit rating?

Student A. Working as financial consultants, you are going to assess the risks facing a small company and
advise on how best to manage them. Listen to the profile of MokaTorre. Identify the main risks and then
rank them in order of their priority and urgency. Decide how these risks can best be managed. What
recommendations can you give to the Company Directors?
 Экзаменационный билет № 2 Student B

The background: Managing economic and financial risk - Unilever Case Study
Profile: Unilever
Unilever is one of the world’s largest corporations. It is Anglo\Dutch consumer goods multinational with
a turnover of 40 billion euro and 163,000 employees worldwide. Its main brands are market leaders in
three main sectors: food, homecare (washing powders, cleaning products, etc.) and personal care (soaps
and shampoos, etc.). Many of its products require raw material commodity ingredients (such as sugar,
coffee and wheat) that can be in short supply and can change sharply in price. It has operations in 170
countries, with more than half its sales coming from developing and emerging markets in Asia, Africa,
Latin America and Central and Eastern Europe. This is presently its fastest-growing geographical market
by far.

The following text is an extract titled “Outlook and risks” from a recent annual report from Unilever,
written at a time of a global economic downturn. The report sets out the possible risks facing the
company in the year ahead and what they propose to manage these risks.
Description of risk What we are doing to manage the risk
Economic
Decline in business during an economic downturn
Unilever’s business is dependent on continuing The breadth of Unilever’s brand portfolio and our
consumer demand for our brands. Reduced geographic reach can help to mitigate local
consumer wealth driven by adverse economic economic risks. We carefully monitor economic
conditions may result in our consumers becoming indicators and regularly model the impact of
unwilling or unable to purchase our products, different economic scenarios. We monitor
which could adversely affect our cash flow, consumer behavior through regular market research
turnover, profits and profit margins. In addition we and adopt a flexible business model which allows
have a large number of global brands, some of us to adapt our portfolio and respond quickly to
which have a significant value as intangible assets: develop new offerings that suit consumers’ and
adverse economic conditions may require us to customers’ changing needs during economic
impair the brands’ balance sheet value. downturns.

Avoiding customer and supplier default

During economic downturns there could be
constrained access to credit. This could impact the
viability of our customers and suppliers and could
temporarily inhibit the flow of day-to-day cash
transactions with suppliers and customers via the
banks.
Operations
Securing raw materials
Our ability to make products is dependent on
securing timely and cost-effective supplies of
production materials, some of which are globally
traded commodities. There are constant changes in
commodity prices according to global economic
conditions, which can have a significant impact on
our product costs.
Financial
Funding the ongoing operation of the business
As a global organization Unilever’s assets value,
earnings and cash flows are influenced by a wide
variety of currencies, interest rates, tax jurisdictions
We regularly monitor and review the health of our
customers and suppliers and implement credit
limits. These reviews are undertaken more
frequently during economic downturns.
We have strategies and policies in place to monitor
short-and long-term raw material demand forecasts.
We have contingency plans to enable us to secure
alternative key material supplies at short notice, to
transfer/share production between manufacturing
sites and to use substitute materials in our product
formulations and recipes.
A key target for the Group is to manage our
financial affairs so as to maintain our A1/A + credit
rating, which gives us continued access to the
 and differing taxes. If we are unable to manage our global debts markets, even when the overall
exposures to any one, or a combination, of these financial markets are under stress. We regularly
factors, this could adversely impact our cash flow, update cash flow forecasts and assess the range of
profits and/or profit margins. A significant shortfall volatility due to interest rates and currencies.
in net cash flow could undermine the company’s
credit rating, impair investor confidence and hinder
our ability to raise funds.

Managing interest rate differences and movements

We are exposed to market interest rate fluctuations In order to minimize interest costs and reduce
on our floating rate debt. This could increase the volatility our interest rate management policy aims
interest cost of our floating rate debt and increase to achieve an appropriate balance between fixed
the cost of future borrowings. and floating rate interest exposures on forecast net
debt levels for the next five years.
Managing currency fluctuations
Because of the breadth of our international In order to manage currency exposures we maintain
operations we are subject to risks from to relative a policy whereby operating companies manage
value of currencies which can fluctuate widely and trading and financial foreign exchange exposures
could have a significant impact on our assets, cash within prescribed limits and by the use of forward
flow, turnover, profits and /or profit margins. foreign exchange contracts.
Answer the questions:
1) How does Unilever’s range of brands and geographic markets protect it from local risks?
2) Why is it important for Unilever to keep its A1/A+ credit rating?

Student B: Your represent the Company Directors of MokaTorre. You have arranged an appointment with a
consultant to assess risks facing your company and give you recommendations on how best to manage them.
Describe the profile of your company. Ask the consultant questions. Make sure you hear practical
recommendations.

Profile: MokaTorre

Activity: Roasting and grinding coffee beans to supply to coffee shops and restaurants.

Owners and staff: Private company founded ten years ago by three brothers; Paulo does the accounts,
Luigi and Mario look after clients. Luigi and Mario don’t speak to each other. They employ six people.

Customers: Supply coffee to 500 outlets in the San Francisco area. Three of their customers have chains
of 50-60 shops. The others are individual restaurants/cafes. Customers have payment terms of 60 to 90
days.

Supplier: Wholesale importer who obtains beans from Costa Rica and Guatemala.
Financial position: They have an overdraft facility of $50,000. They pay 5% over central bank interest
rates when overdrawn. This helps MokaTorre with cash flow, as clients often pay late, but they must pay
their staff on time. They have a fixed interest loan of $150,000 which they used to buy a competitor. The
loan is secured against the owner’s houses.
Business environment: The local economy is booming, but interest rates and inflation are rising.
Our company MokaTorre as the Supplier of coffee beans faces to several risks such as Production and Financial
Risk.

Firstly, High interest rates have considerably increased the costs of processing and storage of the beans. And as
credit is expensive, we need to sell our products quickly in order to earn back those costs. Also high interest rates
may negatively affect in MokaTorre’s investments in capital goods.

Secondly, Inflation causes losses on monetary assets and leads to significant changes in the value of other assets and
liabilities of our company.

Besides, our organization has a certain time interval between the shipment and payment of products, then during
this gap, the value of income decreases.

Доп инфа (by approximately the amount of interest that the organization could receive if the money received at the
time of shipment was deposited in a Bank.)

Also company has a fixed interest loan and an overdraft. Inflation constantly affects the amount of debt. Despite
the fact that MokaTorre will return the same amount, but given its depreciation, it will already be significantly less
than it was before.