PNC Router Case Study Solution

At the end all the risk are finance related, because the liability’s cost money and this will have an effect in the company’s earnings, so what is important is not only to try to avoid such events but also to be prepare in case they happen and have a plan, is like the saying “Hope for the best but be prepare for the worst”.

Leverage ratios examine the organization’s use of debt to finance its assets and its ability to meet the interest payments. Common leverage ratios include debt to assets and times interest earned.

Identify the potential risks which affect the company and manage these risks within its risk appetite;

The key risks that the company faces are economic conditions, competition, key employees, suppliers, availability of credit, financial risks, business continuity, revenue dependence, cost saving, leased property portfolio, as well as, some other minor risks. The amount of risks faced by the company is high, and the realization of those risks is a good possibility in light of the performance of the company.

A review of a company’s profitability lets investors or managers know how efficiently a company is operating. There are three key ratios to review. The profit margin, return on equity and return on assets. The profit margin is the net income divided by sales. The higher the profit margins the better. The return on equity is net income divided by total equity (Cornett, Adair & Nofsinger, 2009).. This can help to determine the amount of financial leverage the company is using. The return on assets is the net income divided by total assets. This can also help determine the financial leverage the company is using in regards to its assets (Cornett, Adair & Nofsinger,

Managers use the degree of operating leverage to gauge the risk associated with their cost function and to explicitly calculate the sensitivity of profits to changes in sales. Managers need to consider the degree of operating leverage when they decide whether to incur additional fixed

Companies employ operating leverage when they use proportionately more fixed costs that variable costs to magnify the effect on earnings of changes in revenue (Edmonds, Tsay, & Olds, 2011, p.57). Home Depot utilized the accounting concept of operating leverage, which justifies why the percentage change in a company’s net earnings is typically greater than the corresponding percentage change in its revenues. As operating leverage increases (decreases), both the overall and systematic volatility of the stock's return increases

The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s

Creating new business and innovation always come with elements called risk and unpredictability, which most business people (managers, senior management, etc.) dislike. Therefore it is very important to know how to get an insight into the risk involved and create predictability for generating growth within a company.

A combination of business risk and financial risk shows the risk of an organization’s future return on equity. Business risk is related to make a firm’s operation without any debt whereas financial risk requires that the firm’s common stockholders make a decision to finance it with debt. Business risk can be evaluated volatility in earnings and profits (coefficient of variation of returns on assets and of operating profits). A measure of business risk is also asset beta or unlevered beta. In case of AHP, it is 1.2 (βa) which is very low signifying low business risk for the firm.

…How an increase or decrease in business risk alters the cost of capital, the optimal capital structure, and future budgeting decisions, and…

West Company's cost structure will include a larger proportion of variable costs than East Company's cost structure. A firm's operating leverage factor, at a particular sales volume, is defined as its total contribution margin divided by its net income. Since East Company has proportionately higher fixed costs, it will have a proportionately higher total contribution margin. Therefore, East Company's operating leverage factor will be higher.

In this essay I will assess the key financial risks that are faced by modern firms and illustrate the ways in which firms go about managing these risks so that they overcome the possibility of a loss in profits. The key risks that I will analyse, will be the fluctuations in inflation, commodity price, exchange rates and interest rates. I will then identify the key problems face by firms in managing these risks.

The investment must be made wisely in order to avoid investment scams, each investment opportunity must be researched thoroughly and deeply . The company must get the facts before to invest , and invest the money that the company can afford to lose. To avoid investment scams , these following steps must be taken:

Leverage Refers to the effects that fixed costs have on the returns that shareholders earn; higher leverage generally results in higher but more volatile returns. Types of leverage include: 1.Operating Leverage 2.Financial Leverage 3.Total Leverage