Explain how risk affects corporate financial strategy. Include the following:
- Business risk
- Credit risk
- Interest rate risk
- Political risk
- Default risk
- Reinvestment risk
Managing risk is one of the most important things that a company must learn to do. By assessing risk factors, and finding ways to lower these risks companies can gain competitive advantage. As an example a company with a higher return on its assets may be able to sustain higher debt loads if returns are higher than current interest rates. This can be a lucrative risk strategy in times of low interest rates. There are several areas to look at when evaluating the financial impact that risk has on corporate financial strategy.
Business risk, as an example, seeks to measure problem areas in operational choices (Henisz, 2002). Business risk forces the company to continuously evaluate the business climate (Henisz, 2002). A company must look at rival products and assess the need for those products in the market. This is compounded by the regulations that may be in place at the time, and the ease of entry into the market. Business risk can have great impact on the company's financial ...
The expert explains how risk affects corporate financial strategies.