Explore BrainMass

Explore BrainMass

    Risk assessment of a manufacturing company that has gone thru IPO

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    1.General risks that would be inherent to a company and how to quantify these risks.
    2.Would need to be able to incorporate how the timeliness, size and risk of cash flows play a part in the assessment.
    3. How would you quantify these risks?
    4.If you were doing a beta calculation using two sets of excess returns, what would the results need to show to be classified as a high measure of risk., and a low measure of risk.
    5. When is this type of calculation appropriate?
    6. When is the coefficient of variation an appropriate measure of risk?
    7. I have alist of 2 sets of excess returns to perform slope calculations. Need an example of how to calculate and how to explain the results.

    Also need current working web sites that will give additional information. This is very important, need to write a short paper.

    © BrainMass Inc. brainmass.com October 9, 2019, 5:00 pm ad1c9bdddf

    Solution Preview

    1.General risks that would be inherent to a company and how to quantify these risks.
    General risks that would be inherent to a company include loss of market, financial loss, loss of personnel, industrial accidents, labor unrest and loss of secrets to competitors. Finance theory (i.e. financial economics) prescribes that a firm should take on a project when it increases shareholder value. Finance theory also shows that firm managers cannot create value for shareholders, also call its investors, by taking on projects that shareholders could do for themselves at the same cost. When applied to financial risk management, this implies that firm managers should not hedge risks that investors can hedge for themselves at the same cost. This notion is captured by the hedging irrelevance proposition: In a perfect market, the firm cannot create value by hedging a risk when the price of bearing that risk within the firm is the same as the price of bearing it outside of the firm. In practice, financial markets are not likely to be perfect markets. This suggests that firm managers likely have many opportunities to create value for shareholders using financial risk management. The trick is to determine which risks are cheaper for the firm to manage than the shareholders. A general rule of thumb, however, is that market risks that result in unique risks for the firm are the best candidates for financial risk management.
    Because of their ability to offset specific risks, derivative securities (also called derivatives) are commonly used in financial risk management. The most commonly traded derivatives include options, futures, forwards, and swaps. Market risk factors that derivatives are commonly based on include stock prices, stock indices, commodity prices, interest rates, and foreign exchange rates. Because unique derivative contracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usually involve derivative that trade on well-established financial markets.

    2.Would need to be able to incorporate how the timeliness, size and risk of cash flows play a part in the assessment.
    To determine operating cash flow, you start with net income and add back expenses which did not result in inflows or outflows of cash. The most common non-cash expense is depreciation. When working with historical figures, adjusting net income with depreciation and other non-cash expenses is much simpler than determining all the revenues and expenses which require or provide funds.
    Next, you identify all the balance sheet accounts that are associated with operations and determine the change in the account from the end of the last period to the end of the current period. What balance sheet accounts are we referring to? Operating cash flow will include all the balance sheet accounts that are a part of normal operations. Trade receivables and payables as well as accrued expenses, prepaid expenses and other current assets that are a part of day-to-day operations are included in operating cash flow.
    But what about the other balance sheet accounts - how do they fit in to this picture? The remaining balance sheet accounts will either be investing activities or financing activities. Once again, you determine the change in each balance sheet account from the beginning of the period to the end of the period, tally them up, and there you have it -- a complete picture of the cash flow for your company.
    If you regularly do a monthly profit and loss statement, you will be aware that there are certain items which may not affect your profit and ...