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business risk, financial risk, and beta

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1. Define and Discuss the relationship between business risk, financial risk, and beta (systematic or market risk).

2. Explain why certain shareholders would have a preference on receiving dividends and on the amount of the dividend. If you were a shareholder of Apple, what would you prefer: dividends or stock appreciation? Please explain your reasons.

3. Discuss the optimal amount of accounts receivables relative to the cost and benefits. Please explain how important the accounts receivables are for a company and most importantly, how much do you think a company must have on accounts receivables?

4. Compare and contrast the impact of supply chain management on working capital needs. Please explain why supply chain management is important for a company and how it can increase the cash needs of the company.

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1. Beta gives the systematic risk. The systematic risk is determined by the business risk and the financial risk. Business risk refers to the possibility that a business' cash flows are not enough to cover its operating expenses like rent, wages, and cost of raw materials. On the other hand financial risk refers to the possibility that the business' cash flows are not enough to pay creditors and fulfill its financial responsibilities. Financial risk relates to the business debt, which may be incurred by business operations, but business risk is independent of the debt of the business. Business operating leverage and financial leverage can be combined in several ways to get the required level of systemic risk. High business risk can be offset by low financial leverage to achieve the required systemic risk. Systematic risk or beta measures the volatility of a security or a portfolio compared to the market as a whole.

2. Certain shareholders would have a preference on receiving dividends because dividends represent the cash that the ...

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Risk

Scenario:

The Hammons, Tim (35), Anna (32), children Mary (13) and Mark (11), consider themselves among the typical up and rising middle class. Overall, by today's standards, they have achieved a fair level of success: they are buying a home, have a modest savings account, and hold some investments. After serving 4 years in the military as an intelligence agent, Tim currently holds the position of plant manager at a local firm. Anna, a stay-at-home mom, is considering starting a private duty nursing service for the terminally ill. Based on her previous experience as a registered nurse, she fully understands the demand for private nursing care and the relatively low level of supply.

Over the years, the Hammons have had lengthy discussions about their future aspirations and dreams for themselves and their children. Future plans include having sufficient funds to help the children with their educational pursuits, buying a family vacation home on the beach in South Carolina, and retiring when Tim reaches the age of 55.

When Tim and Anna reach retirement, they aspire to continue enjoying their current standard of living, travel internationally, and spend ample time with family members located throughout the United States and Canada. Tim and Anna dream of living comfortably, but they also desire to leave a well-endowed estate for their children.

The Hammons appreciate the importance of having an adequate financial plan that incorporates their desires, so they have contacted you, a licensed financial planner, to help guide them through the process. Based on their objectives, you have proved the following timetable for the Hammons:

Short-term

Review, estimate, and purchase insurance coverage for both Tim and Anna.
Develop and implement an investment plan to achieve the family's objectives.
Develop a strategic plan for Anna's private duty nursing service.
Long-term

Implement Anna's private duty nursing service.
Purchase a beach home in South Carolina.

Problem:
After having read some information about the various risks that firms encounter, the Hammons have asked you to investigate and analyze specific risks they may encounter as owners of a private duty nursing service. Your investigation and analysis should be specific and focused on three areas: business risk, financial risk, and portfolio risk.

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