Question

1. List the 5 types of risk and give an example of each. 2. (4 points) What are two ways to increase the growth rate? 3. (4 points) If there is a positive use of financial leverage, does this mean there is no risk? Yes or No.

2. What are two ways to increase the growth rate?

3. If there is a positive use of financial leverage, does this mean there is no risk? Yes or No.

Answer 1

A) The types of risk are

1. Business Risk: These types of risks are taken by business enterprises themselves in order to maximize shareholder value and profits. As for example, Companies undertake high-cost risks in marketing to launch a new product in order to gain higher sales.
2. Non- Business Risk: These types of risks are not under the control of firms. Risks that arise out of political and economic imbalances can be termed as non-business risk.
3. Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more.

4. Market Risk:

   This type of risk arises due to the movement in prices of financial instrument. Market risk can be classified as Directional Risk and Non-Directional Risk. Directional risk is caused due to movement in stock price, interest rates and more. Non-Directional risk, on the other hand, can be volatility risks.

5. Credit Risk:

   This type of risk arises when one fails to fulfill their obligations towards their counterparties. Credit risk can be classified into Sovereign Risk and Settlement Risk. Sovereign risk usually arises due to difficult foreign exchange policies. Settlement risk, on the other hand, arises when one party makes the payment while the other party fails to fulfill the obligations.

B)

There are two ways to increase growth

1) Via mergeres and acquisitions

2) Via entering new markets and developing new products which are unique in the market

C)

Yes, Financial leverage adds on risk on our balance sheet

Adding leverage introduces riskl on the balance sheet