Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee
Question:
a. Why might stockholders be indifferent to whether or not a firm reduces the volatility of its cash flows?
b. What are six reasons risk management might increase the value of a corporation?
c. What is corporate risk management? Why is it important to all firms?
d. Risks that firms face can be categorized in many ways. Define the following types of risk:
(1) Speculative risks
(2) Pure risks
(3) Demand risks
(4) Input risks
(5) Financial risks
(6) Property risks
(7) Personnel risks
(8) Environmental risks
(9) Liability risks
(10) Insurable risks
e. What are the three steps of corporate risk management?
f. What are some actions that companies can take to minimize or reduce risk exposures?
g. What is financial risk exposure? Describe the following concepts and techniques that can be used to reduce financial risks:
(1) Derivatives
(2) Futures markets
(3) Hedging
(4) Swaps
h. Describe how commodity futures markets can be used to reduce input price risk.
i. It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an expansion. Currently, the firm can issue 20-year bonds with a 7% coupon (with interest paid semiannually), but interest rates are on the rise and Stooksbury is concerned that long-term interest rates might rise by as much as 1% before June. You looked online and found that June T-bond futures are trading at 111′25. What are the risks of not hedging, and how might TS hedge this exposure? In your analysis, consider what would happen if interest rates all increased by 1%
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Intermediate Financial Management
ISBN: 978-1111530266
11th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Question Posted: