Question

Discuss how reducing the cost of risk enhances Business Value and the possible conflicts between Business and Societal objectives

Answer 1

Risk is always uncertain and the reduction of risk brings certainty and this certainty gives the business owners and investors more confidence about the future cash flows. The more certain future cash flows will result in a better forecast which in turn increases or enhances the business value.

For example: If a business A has cash flows of 10,000 per year for 10 years with a probability of 0.5 and another business B has cash flows of 8,000 per year for 10 years with a probability of 0.8. For this we can see that business B is more certain and the cost of risk is reduced due to higher probability. So, the risk adjusted cash flow for A is 10,000*0.5 = 5,000 and that for B = 8,000*0.8 = 6,400. So the project B although has a lower projected cash flow of 8,000 has higher business value due lower risk (cost of risk is reduced)

The possible conflict between business and society arises when the business is solely concerned with the generation of profit and does not care about the society that it operates in. In order to reduce the conflicts businesses now are involved in something called corporate social responsibility wherein the businesses try to give back something to the society which helps them do the businesses successfully.