Business

workshop MCF

RM creating value?

RM motivation

• to smooth the earning                

(why important : to avoid the underinvest problem. in general to increase flexibility so you don’t miss good investment opportunity)

underinvest problem: already high level of debt, shareholders would reject low risk projects

asset subst: shareholders exchange low risk projects for high risk projects.

earning

do risk management to be able retained earnings, because dabt is costly

—transaction costs

—information asym

—monitor costs

• to reduce the discount rate
• risk aversion:  manage risk averse their wealth is tied to firm value they prefer hedging
• taxes(convex: that is why we do hedging  to avoid the disproportional tax payment)

-   financial distress costs hedge to avoid this

MM(1958)                                                        

1. FV is independent of capital structure                         

2. costs of equity (increase) as D/E increase

Perfect market

No competition

No transaction costs

easy access  to capital markets

everyone can access to the same information

action rational

Nocco (2006)

enterprise risk management : considering all the risk of the entire corporation

1. 2 benefits(micro and macro)

micro:risk return take-off

macro: take up more business risk by managing financial risk

1. financial risk/business risk(non-core risk and core risk)

(business risk, core risk, is about the business itself and financial risk, non core risk,is about adding debt to your capital structure and how this is affecting shareholders)