Application Question: A fashion clothes chain store selling Japanese products

Questions:

A fashion clothes chain store, a listed company, imports Japanese products for sales in Hong Kong. Recently, this chain store has been operating at a loss, and contemplates to raise fund by issuing either bonds or new shares.

(a)    The chain store reported that the loss is mainly due to the change in the value of the Hong Kong dollar, which is unfavorable to its imported products. Explain whether the Hong Kong dollar appreciates or depreciates against other currencies in this case.  (2 marks)

(b)   The annual sale revenue of this chain store is reported to be about 100 million. Does this amount truly reflect its net contribution to the Gross National Product? Explain.  (3 marks)

(c)    Explain why a listed company can raise fund easier than a private company. (2 marks)

(d)    State ONE reasons why bonds could be a better choice than shares for

(i)     the company.  (1 mark)

(ii)    the investors.  (1 mark)

Answers:

(a)

The Hong Kong dollar depreciates. (1)

The price of imported goods and thereby the selling cost rise. (1)

(b)

No

Part of value is added by foreigners not domestic people. (1)

The net contribution to the GDP is the sales revenue minus import cost. (1)

(c)

Wider sources of funding such as raising fund from the public. (1)

More good credit standing (1)

(d)

(i)

Bondholders don’t have the voting rights. (1)

No loss in control over the business  (1)

(ii)

Stable positive interest (1)

Not the last one to be paid when the company is liquidated.  (1)