Financial Risk Management: A Comprehensive Report and Analysis

This report, titled "Financial Risk Management," presents a comprehensive analysis of various financial concepts and techniques. Section 1 addresses key questions regarding corporate finance, including the establishment of intrinsic value through going public, the application of Net Present Value (NPV) for project viability, the roles of borrowers and savers, and the ethical responsibilities of firms. Section 2 delves into practical exercises, such as ratio analysis, growth rate calculations, and cash flow from assets, using provided financial data. The report includes calculations of key financial metrics like liquidity ratios and the impact of market value versus book value per share. The analysis also touches upon ethical considerations, agency conflicts, and the importance of corporate governance. The report utilizes references to support its findings and includes appendices with detailed calculations.

Running head: FINANCIAL RISK MANAGEMENT
Financial Risk Management
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Section 1..........................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................2
Question 4....................................................................................................................................2
Question 5....................................................................................................................................3
Question 6....................................................................................................................................3
Question 7....................................................................................................................................3
Question 8....................................................................................................................................3
Question 9....................................................................................................................................4
Question 10..................................................................................................................................4
Section 2..........................................................................................................................................5
Exercise 1.....................................................................................................................................5
Exercise 2.....................................................................................................................................5
Exercise 3.....................................................................................................................................5
Exercise 4.....................................................................................................................................6
References........................................................................................................................................7
Appendix..........................................................................................................................................8
1) Ratio Analysis.........................................................................................................................8

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2) Growth Rate............................................................................................................................9
3) Cash Flow from Assets..........................................................................................................10

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Section 1
Question 1
"Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid
market will always exist for the firm's shares.
The above statement is false or incorrect as going public would definitely establish an intrinsic
value for the firm, but it would not necessarily be creating liquidity for the shares of the
company.
Question 2
The common technique that is usually applied for the purpose of assessing the viability of
the project is the application of Net Present Value Method. The method shows the net benefits or
the value that would be created by the company when the given set of project is accepted (Levin
and Hallgren 2017).
Question 3
In common it is well said that the non-financial corporations are referred as borrower and
individuals as a net savers (Su et al., 2018). There are several ways in which the transfer of
money can well happen between the two parties that is from individuals saving to borrowers via
direct transferring of money and various securities. On the other hand, it can also transfer on an
indirect basis through investment banking (Siziba and Hall 2019).
Question 4
The differentiation done by banks between individuals and corporations for granting loan
is generally done in the form of interest rate charged and the tenure that is associated for the

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loan. In the case of individual loans, the interest rate is generally higher and the tenure associated
with the loan is generally low because of the low security and mortgage amount backed up. On
the other hand, in the case of Corporate Loan the tenure is generally high and interest rate is low
whereby the company also have a higher amount of mortgage backup.
Question 5
It is well important to have a specific set of rules that all employees are well expected to
adhere with so that the ethical guidelines and practices are well followed within an organisation.
Application of these rules would help constraint actions, and it is well important to prove the fact
the organisation or company is taking corrective form of actions even if the employees in an
organisation does follow an incorrect approach.
Question 6
The above statement well refers to the ethical dilemma stating that CEO of companies
generally tend to over utilize the available set of fund for investment which would increase the
pay-scale of the CEO, but in turn it might not increase the value for the shareholders of the
company.
Question 7
It is the ethical responsibility of the firm to provide a safe working environment to the
employees, avoid actions which would harm society and environment as a large such as reducing
air and water pollution and produce and deliver a safe product.
Question 8
Banks can easily give loans for the purpose of well increasing the stability by giving
loans at lower rate of interest rates, then the company debts are said to reduce subsequently.

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However, as the cost of equity rises with the taken actin the cost of capital gets affected. The
prevailing economic condition in an economy can also tend to affect the same (Frank and Shen
2016).
Question 9
Organic or Internal Growth is generally seen when the business well expands its own set
of operations by well relying on the various internal resources and capability of the company
itself. On the other hand, in the case of External Growth there are strategies which would allow
the company to increase its resources and capabilities with the help of external approaches like
Merger & Acquisitions and Strategic Alliances (Mermelstein et al., 2020).
It is important to note that external growth can be important at that point of time when the
company want to expand its product line into other set of lines and divisions which can be easily
done by acquiring a company which in turn would increase the sale and customer base and the
overall profitability (Davis 2016).
Question 10
1) Internal Mechanisms are some of the key ways and methods which should have been used by
the firm for well enhancing the wealth for the shareholders. Improper communication, care and
improper audit of the work executed were some of the key issues that lead to the failure in the
Corporate Governance Mechanism (Bajra and Čadež 2019).
2) Yes there was an agency conflict in the Stanford as management were not working in the best
perspective and view interest of shareholders of the company.
3) Emphasizing targets rather than proper care, the management of Stafford Hospital has created
such an environment that would be discourage any complaints and it resulted in high mortality

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rates. The public campaigns of the various family members and other relatives would be helping
to well vocalize their knowledge set of data for Stafford failure in providing basic nursing care
was the key reason for government investigation. The ongoing situation has well impacted the
global corporate governance.
Section 2
Exercise 1
Ratio Analysis (Appendix 1).
The liquidity position of the company is quite stable where the company is having
significant amount of current assets in respect to meeting its current obligations. The
performance of the firm in terms of net profit margin and return on equity has been quite stable
and good.
Exercise 2
a) The growth rate of the firm will be well calculated with the help of following formula:
Growth Rate: Retention Rate*Return on Equity
Where; Growth Rate: (1-Payout Ratio)*(Net Profit/Shareholder’s Equity)
Growth Rate: 11.37% (Appendix 2).
b) The growth rate determined shows the maximum possible amount that the company can well
grow with the current level of business profit it is generating and the amount it is well retaining
for the purpose of refinancing the business operations. The growth rate would well help the firm

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assess the areas which it needs to improve for increasing overall growth and create value for
shareholders.
Exercise 3
a) The cash flow from Assets for the firm has been calculated to be around $1,732 (Appendix 3).
b) The liquidity position of the firm has increased considerably for the firm which has been
assessed with the help of availability of Net Working Capital and Current Ratio which has
increased well for the company in the year 2010 & 2011, due to significant decrease in the
current liabilities of the company.
Particulars 2010 2011
Current Assets 6127 4771
Current Liabilities 4194 1532
NWC 1933 3239
Particulars 2010 2011
Net Fixed Assets 17489 17107
Particulars 2010 2011
Current Assets 6127 4771
Current Liabilities 4194 1532
Current Ratio 1.46 3.11
Exercise 4
The difference in Market Value and Book Value per Share has been around $27 and has
around 51.92% as a percentage difference, the difference is particularly depending upon the
future growth prospects and the market value of the firm on a whole.
Particulars Amt ($)
Total Common Equity 3125000
Stock Outstanding 125000

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Book Value Per Share $ 25.00
Market Value Per Share $ 52.00
Absolute Difference $ 27.00
Percentage Difference 51.92%

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References
Bajra, U. and Čadež, S., 2019. Alternative regulatory policies, compliance and corporate
governance quality. Baltic Journal of Management.
Davis, P., 2016. How do sharing economy companies grow? A comparison of internal and
external growth patterns of Airbnb and Uber.
Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal of
Financial Economics, 119(2), pp.300-315.
Levin, V. and Hallgren, A., 2017. The choice of capital budgeting techniques: a human capital
approach.
Mermelstein, B., Nocke, V., Satterthwaite, M.A. and Whinston, M.D., 2020. Internal versus
external growth in industries with scale economies: A computational model of optimal merger
policy. Journal of Political Economy, 128(1), pp.000-000.
Nawaiseh, M.E., Al-nawaiseh, H., Attar, M.D. and Al-nidawy, A., 2017, September. The Use of
Capital Budgeting Techniques as a Tool for Management Decisions: Evidence from Jordan.
In International Conference on Engineering, Project, and Product Management (pp. 301-309).
Springer, Cham.
Siziba, S. and Hall, J.H., 2019. The evolution of the application of capital budgeting techniques
in enterprises. Global Finance Journal, p.100504.

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Su, S.H., Lee, H.L., Chou, J.J., Yeh, J.Y. and Thi, M.H.V., 2018. Application and effects of
capital budgeting among the manufacturing companies in Vietnam. International Journal of
Organizational Innovation (Online), 10(4), pp.111-120.
Appendix
1) Ratio Analysis
Particulars 2012
Current Assets $24,654.00
Current Liabilities $18,480.00
Current Ratio 1.33
Current Assets-Inventory $11,214.00
Current Liabilities $18,480.00
Quick Ratio 0.61
Accounts Receivable 9,660.00
Net Credit Sales $58,800.00
No of Days in Year 360
Day's Sales Outstanding 59
Sales $58,800.00
Total Assets $42,000.00
Total Assets Turnover 140%
Cost of Goods Sold $54,978.00
Inventory 13,440.00
Inventory Turnover Ratio 4.09
Total Debt $29,400.00
Total Assets $42,000.00
Debt to Assets Ratio 0.70
Net Profit $1,133.00
Total Assets $42,000.00
Return on Assets 2.70%
Net Profit $1,133.00
Shareholder's Equity $12,600.00
Return on Equity 8.99%
Net Profit $1,133.00
Sales $58,800.00
Net Profit Margin 1.93%
Share Price $77.69
Earnings Per Share $6.47
Price to Earnings Ratio 12.00
Ratio Analysis

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2) Growth Rate
Growth Rate: Retention Rate*Return on Equity
Growth Rate: (1-Payout Ratio)*(Net Profit/Shareholder’s Equity)
Growth Rate: Retention Ratio*(Net Profit/Shareholder’s Equity)
Retention Ratio
Total Dividend Paid 950
Total Earnings Earned 2600
Payout Ratio 36.54%
Retention Ratio 63.46%
Return on Equity
Net Profit 2600
Shareholder's Equity 14510
Return on Equity 17.92%
Growth Rate 11.37%

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3) Cash Flow from Assets
Change in NWC NWC end NWC beg
Change in NWC 3239 1933
Change in NWC 1306
Net Capital Spending: NFA End- NFA Beg + Dep
Net Capital Spending: NFA End NFA Beg Dep
Net Capital Spending 17107 17489 1611
Net Capital Spending 1229
CFA: OCF- Change in NWC- Net Capital Spending
Cash Flow From Asset
Where OCF: EBIT+ Depreciation-Tax
OCF 4267
Cash Flow From Asset 1732