Risk Tolerance in Financial Decision Making

Question: Discuss about the Risk Tolerance in Financial Decision Making. Answer: Introduction: This report is based on the Harvey Norman Holdings Limited's 2015 annual report. Harvey Norman is listed on the Australian Securities Exchange as a public company operating in the security exchange market. This report will analyze the company's 2015 book value of debt and the book value of equity. Conversely, Harvey Norman's Interest Rate Risk Management has also been scrutinized as well. Harvey Norman's book value of debt As at 30th June 2015, Harvey Norman's book value of debts stood at $ 1,801,684 million which was an increment from $1,715,025 during the 2014 financial year. The book value of debt comprises of both the current liabilities which stood at $1,283,079 and non-current liabilities which was $ 518,605. Both categories of liabilities were increased between the financial years 2014 and 2015. Harvey Norman's book value of equity As at 30th June 2015, Harvey Norman's book value of equity stood at $2,556,860 which was an increment from $ 2,491,106 during the 2014 financial year. The total value of equity is made up of; a) contributed equity at $ 380, 328; b) Reserves at $ 113, 290; c) retained profit at $ 2,043, 463; and d) Non-controlling interests at 19,779. All these categories of equity, as listed in the company's annual report, had all increment between the 2014 and 2015 financial years. Harvey Norman's Interest Rate Risk Management According to the company's 2015 annual report, Interest Rate Risk Management has defined as "The risk that movements in variable interest rates will affect financial performance by increasing interest expenses or reducing interest income (Campbell, 2014, p. 23)." The company's interest rate risk during the 2015 financial year arose from balance sheet items such as bills payable, cash and cash equivalents, bank overdraft, borrowings, non-trade debts and non-trade debts owed to related parties and directors. Harvey Norman's interest rate risks range between 0.01% and 12% according to respective items named above. The following table shows a summarized interest rate risks according to different balance sheet items: Balance sheet items Interest rate risk Floating Fixed Cash 0.20%-3.60% 0.01%-4.10% Loans 9.00% Receivables 10.00%-12.00% Non-trade debtors loans 4.32%-12.22% 7.00%-12.00% Borrowings 0.47%-5.93% Interest rate swaps 5.21%-5.54% Other loans 3.07%-4.22% Bank overdraft 1.97%-6.68% Bills payable 2.08%-2.72% Finance lease liabilities 9.50% Other financial liabilities 5.21%-5.54% Note: As a consolidated entity, The Company pays its interests at different floating rates to prevent the risk interest rates from increasing. Sensitivity analysis on the companys interest rate risks The Harvey Norman holding uses a sensitivity of 50 basis point decrease and 50 basis point increase based on the fluctuation of the Australian dollar exchange rate both in the short and long run. The interest rate risk analysis shows that in the event that the rates moved, the after tax profit would be affected (other factors remaining constant) (Harvey Mayne, 2016, p. 122). The change in the post-tax profit is caused by lower/ higher interest rates from cash balances and variable rates of debts. Likewise, the movement experienced in the comprehensive income resulted from decrease/ increase in the fair value of cash flow items. The movement of interest rate experienced in 2015 was less sensitive compared to those in 2014 (Harvey Mayne, 2016, p. 123). References list Campbell, J. Y., 2014. The Econometrics of Financial Markets. Princeton University Press: Washington, DC. Guenther, D. A., 2004. Financial Reporting and Analysis. New York: McGraw-Hill. Harvey, N. Mayne, J., 2016. 2015 Annual Report: Harvey Norman Holdings Limited, Kent Street, Sydney NSW: Harvey Norman Holdings Limited. Kaplan, D., 2012. Introduction To Financial Statement Analysis. New Delhi, India: The Kaplan Group. Lucarelli, C., 2011. Risk Tolerance in Financial Decision Making. Washington: Palgrave Macmillan Studies.