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Module Four: Assessing a Company’s Future Financial Health Case Study
Systemic and Unsystematic Risk
When you enter the business and financial world, nothing is certain and there is plenty of risk attached to it. It is vital to a company’s financial health that those risks are being watched while gauging risks that aren’t apparent at the beginning. There are two types of risks to oversee and those are systemic risks and unsystematic risks. The
systematic risk
is a result of external and uncontrollable variables, which are not industry or security specific and affects the entire market leading to the fluctuation in prices of all the securities (Surbhi S, 2017). Systemic risk can unfortunately not be foreseen and does not fault on anything anyone. A great example of this would be the COVID-19 global pandemic. This pandemic affected everyone around the world and caused many businesses to fail. Unsystematic risk
refers to the risk which emerges out of controlled and known variables, that are industry or security specific (Surbhi S, 2017). This risk rises from microeconomic factors and could be foreseen or handled through protocol. An example of this would be a fresh new competitor in the market, change in management, or manufacturing/product recalls. Financial Risks
In the case study regarding SciTronics, we recognized four financial risks that has impacted their financial health. Interest rate risk is the risk that changes in interest rates (in the U.S. or other world markets) may reduce (or increase) the market value of a bond you hold (
Understanding Bond Risk | FINRA.org
, n.d.). In SciTronics case, they’re increase in interest rate
had gone up resulting in less profit. Less profit results in lack of pay to the investors. While this risk remained a priority, the economic risk of the company can vary. The firm’s strategy and sales growth in each of its business units will determine the investment in assets needed to
support these strategies; and the effectiveness of the strategies, combined with the response of competitors and regulators, will strongly influence the firm’s competitive and profit performance, its need for external finance, and access to debt and equity markets (Casewriter, 2012). Next, credit risks. Credit risk is the possibility of a loss resulting from a borrower's failure
to repay a loan or meet contractual obligations (LaBarre, 2022). Credit risk can happen to anyone, especially businesses. Many company starters do not have the full funds to start their business. This is where debt collectors, loan providers, and investors come in. As well as the consumers whom the company puts their trust in too. This means, holding their buyers accountable for the funds needed for payment. If the consumer does not pay, the business does not make any profit and there is no revenue to payback or invest back into their company. Lastly,
operational risks. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events (
Operational Risk Management: An Evolving Discipline
, n.d.). While this may be overlooked, it is very important. Examples of this could include processing errors, legal claims, fraud. What makes this risk difficult to control is due to the variety of reasons this can impact your company. SciTronics must hold employees accountable to proper strategy and protocol or this could result in their downfall. Lower Growth Impact
If SciTronics were to experience lower sales growth, any form of expansion would have to halt. If, however, the company reduced its sales growth to 5% (and total assets, accounts payable and accrued expenses increased accordingly by 5%), the need for additional external finance would drop from $126 million to $0 (Casewriter, 2012). If SciTronics were to experience
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Related Questions
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These include currency risks, interest rate risks, credit risks, liquidity risks, cash flow risk, and financing risks. The importance of these risks will vary from one organization to another. A firm that operates internationally will be more exposed to currency risks than a firm that operates only domestically; a bank will typically be more exposed to credit risks…
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Question Two
Risk in the widest sense is not new to business. All companies are exposed to traditional business
risks: earmings go up and down as a result of such things as changes in the business environment,
in the nature of competition, in production technologies, and in factors affecting suppliers. The
issue of risk has captured considerable attention from corporate management in recent years, as
financial risk management has become a critical corporate activity. Regulators have also responded
with new legislation, regulations, and practices that seek to improve corporate govemance
standards.
Required:
Some in the academic world contend that corporate risk management is a zero-sum game. Discuss.
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Risk management is concerned with understanding and managing the risks that an organization faces in its attempt to achieve its objectives. These risks will often represent threats to the organization – such as the risk of heavy losses or even bankruptcy. Risk management has traditionally associated itself with managing the risks of events that would damage the organization.Organizations face many different types of risks including financial risk, financial risks relate to the financial operation of a business– in essence, the risk of financial loss (and in some cases, financial gain) – and take many different forms.These include currency risks, interest rate risks, credit risks, liquidity risks, cash flow risk, and financing risks. The importance of these risks will vary from one organization to another. A firm that operates internationally will be more exposed to currency risks than a firm that operates only domestically; a bank will typically be more exposed to credit risks than…
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Transfer the risk
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Question 19, P1-12
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In finance, the term risk management involves identifying the potential risks the organization may face in the future, analyze the impact of the risk and implement measures so that either is absolved or its adverse impact is minimized. Content analysis:
a. discuss the categories of risks in financial institutions.
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Required:
‘Risk management is not about elimination of risk’, Discuss.
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1. Explain two types of financial risks that are faced by banks operating in the financial sector.
2. Now, discuss how a risk management tool can be used in order to mitigate such risks .
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For insurance companies risk management is critical to the success and viability of their business. As a result, they have therefore adopted strategies to manage the risks they are exposed to.
You are required to:
Explain underwriting risk and discuss two risks faced by insurance companies.
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11. Which of the following security holders receives a
lower returns with low risk?
. T-Bill B. Common shareholders C. Stakeholders D.
Creditors
12. The advantage of a company compared a sole trader
as form of business organisation is:
A. Quick decision making B. Access to external
professional management skills C. Use of own funds D.
Inability to access external funds
Thank you!!!
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QUESTION:
Explain further what "consistency" means. How do laws control consistency in financial markets? Explain. Then identify the risks that arise from it.
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Using a bpmn modelling tool, model the control flow of a business process for modelling credit risk? the process starts when a new credit request is received. A risk management officer checks the levels of the application. If the risk is above a threshold, an advanced risk assessment needs to be carried out, otherwise a simple assessment will suffice. Once the assessment has been completed, the customer is notified with the assessment result while the disbursement is arranged. Fir simplicity, assume that the result of an assessment is always positive
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match the correct description with the correct term.
Descriptions
Terms
The level and nature of risk attributable to a firm’s activities and operations, and ignoring the risks associated with the firm’s capital structure.
Asymmetric information
The situation in which outsiders, such as external shareholders, credits, suppliers, and customers have less and inferior information about a firm’s past, current, and future conditions and prospects, compared to the firm’s managers.
Business risk
The extent to which a firm’s cost structure contains a large proportion of fixed costs, which raises its level of business risk if the firm’s sales decline.
Capital structure
This practice of employing a large proportion of fixed-cost sources of financing, such as debt securities and preferred stock, exposes a firm’s stockholders to more business risk.
EPS indifference point
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Role of Central Banks and Moral Hazards
The consequences of moral hazard. What are the adverse results of moral hazard for the financial system?
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Subject: Financial strategy & policy
Question No 1
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How risk can be managed in those areas?
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2 - an opportunity to commit fraud
3- a rationalization for committing fraud
state the reasoning behind the category you choose
Scenario:
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Question content area bottom
Part 1
A.
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B.
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