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Asian Firms in Mexico

1. Why do businesses take risks?
2. Why have Asian firms established operations in Mexico in recent years?
3. Which are the main differences between country risk and political risk?
4. How do you explain the importance of capital budgeting analysis to a firm?

Solution Preview

1. Why do businesses take risks?
Risk is an aspect of any organization's operation. Business takes risks because it operates in uncertain environment. Some risks cannot be avoided for example systematic risk or external risk. Moreover higher risks lead to the greater return.
Thus if business don't take risks than it will not be able to earn superior profits and thus will not be able to satisfy the shareholders expectations. Hence for earning superior profits business has to take risks.
Preview on risk:

For our current purposes, we can classify the risk of a firm into two types

? Business risk is the riskiness of the firm without debt, which is due to the uncertainty associated with the firm's cash flows. This type of risk depends on a number of factors including demand variability, sales price variability, input cost variability, pricing power, R&D efficiency, foreign risk exposure, and the degree of operating leverage
? Financial risk is the risk that results from the use of debt. Since debt issues come with the obligation to make fixed payments, regardless of the business fortunes of the enterprise, they introduce a higher degree of uncertainty to NOPAT. Thus a higher degree of financial leverage, while increasing expected return on equity also increases the riskiness of those returns.

When it is recognized, understood, and managed, risk can set the stage for sustainable growth. Companies need ...

Solution Summary

875 words on why businesses take financial, societal and political risks, such as Asian firms moving to Mexico.

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