Question

What is the relationship between financial decision making and risk and return? Would all financial managers view risk-return trade-offs similarly? Pick a fictitious company or the company you chose in your weekly discussion and examine how the company management views risk-return trade-offs. Why do organizations take risk? Support your position with figures or charts. Ensure all the questions are addressed.

Your paper must be two-pages in length, double spaced with proper citation and references. Use at least two peer reviewed articles or scholarly journals from your online library to support your discussion.

Answer 1

risk : risk is a part of business, risk taking is important in a business to increase the shareholder value. unfortunately, many companies do not know how to manage their risks which is where the real problem rises.

return: with taking additional risks, the return of a company increases but with proper risk management techniques.

higher risk is associated with higher returns ,and lower risk is associated with lower returns.the trade off which a investor faces between return and risk is called risk-return trade off.

not all financial managers view risk-return trade offs similarly,because the level of risk that a company can take is not the same.

some companies may be having higher levels of debt, raising the level of risk in an already risky company can be dangerous and can lead to bankruptcy.

the company in my study is a small cap biotechnology company, bluebird bio (NASDAQ:BLUE), its main work is to extract a patients cells, introduce heathy gene the patient 's body and then reintroduce them back into the patients body.

currently, the company is in late stage clinical trail with two different therapies the Lenti-D ,which is designed to cure hereditary neurological disorders. the other one is lentiglobin which cures several sickle cell diseases. Both the technologies are high risk. With an emerging treatment , there lies high investments ,which the investors need to be aware of. With such expensive treatments ,there are lies a huge risk to get payers on board and educate specialist and train them to give this treatment to treat patients, Although the risk riding on this company are huge, but this company continues to show strong clinical outcomes,it maybe a stock worth investing in.

WHY DO ORGANIZATIONS TAKE RISK:

organizations take risk, because with proper risk management techniques ,organizations can manage risk effectively which can result in higher returns for them. A very prudent and careful approach to business is rarely awarded .

for instance,companies take on debt even though the debt holders have to be paid first and not paying the debt holders can result in litigations and bankruptcy. still, companies take on additional debt, because taking on additional debt can bring in debt tax shield and rise the value of the company's

it lowers the WACC, thus bringing in higher valuations for the company .

suppose the cash flows of the company is $2500, the wacc is 13% now after taking additional debt the wacc now becomes 11%. so the value of the company rises after taking on additional risk in the form of higher debt levels.

the value of the firm was : 192.30

now the value of the firm is : 227.72.

taking additional risk is okay,till proper risk management techniques are in place ,otherwise the business may run into risk levels which may be dangerous for the shareholders and management.