Risk profile is the representation of a company’s overall exposure to specific risks or group of risks at a given point of time. A company’s desired and targeted risk profile depends on its corporate governance approach, overall strategic objectives …
A company’s desired and targeted risk profile depends on its corporate governance approach, overall strategic objectives and risk appetite. I. Overall Risk Profile The two basic types of risks that the company ABC might face based on the current economic and industry issues are- Systematic Risks- It influences a large number of assets and protection against such risk is virtually impossible. Unsystematic Risks- It is sometimes referred to as “specific risks”. Diversification is the only way to prevent unsystematic risk. The other fundamental risks that the company might face are- Credit or Default Risk- It arises when a company will be unable to pay the contractual principle or interest on its debt obligations. Liquidity Risk- It arises when the liquid resources available to a company will be unable to pay the current dues. Interest Rate Risk- It arises when the value of an investment changes due to change in interest rates (Yusof, 2007, p.7). Political Risk- It represents financial risk, which arises when the government of a country changes its policies suddenly (Yusof, 2007, p.9). Market Risk- It arises as a result of day-to-day fluctuations in stock prices, so it is also referred as volatility. Business Risk- It may arise internally as a result of human, technology, or physical factors, or externally due to economic, natural, or political factors. II. Current Cash Flow of the company a. Cash Flow Statement of ABC Company Amount($) Amount($) Amount($) Cash from operating activities- Sales 1,200,000 (+) Decrease in Accounts Receivable 60,000 Cash collection 1,260,000 Less:- Cost of goods sold 800,000 (+) Increase in inventory 70,000 870,000 (-)Increase in account payable 40,000 Cash paid for purchase 830,000 Selling & Development Expenses 250,000 Interest expenses 0 Income taxes 30,000 (-) Increase in Income tax payable 30,000 0 180,000 Cash from financing activities- (-)Payment of dividend 100,000 (100,000) Cash flow from investing activity- (-)Purchase of equipment 100,000 (100,000) Net decrease in cash (20,000) Add:- Opening cash balance 70,000 Ending cash balance 50,000 b. i. The cash flow statement of the company shows that the sources of fund or cash to the company are less as compared to the expenditure made. The statement above shows a decrease in cash, which resulted due to increase in expenditure as compared to the revenue generated. Expenditure is incurred in the financing and investing activities of the ABC Company out of the cash generated from operations, which lead to decrease in available cash as a result of excessive investment. There has been only three sources of fund, two in the process of generating liquid cash, and the third source though generates cash but not in liquid form, as the cash is due to be realized. The two liquid sources are sales and decrease in accounts receivable due to realization of cash that was due. The source from which cash is yet to be generated is inventory. The cash generated has been utilized in various activities as depicted by the statement given above. ii. So as to improve the cash condition, the company ABC needs to reduce the expenditure as per the generated revenue. This is said so based on the cash flow statement which shows a decrease in net cash after performance of all the operations. The other alternative present to the company is to increase the revenue generation so as to meet the rising expenditure. If the company ...
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