Textbook Problem

List seven reasons risk management might increase the value of a firm.

Summary Introduction

To discuss: The seven reasons for risk management could increase the value of a firm.

Introduction:

Risk management is a technique used in business to evaluate the financial risks associated by it. It helps to identify certain procedures to avoid or minimize their impact in the business.

Explanation of Solution

The seven reasons for risk management can increase the value of a firm are as follows:

• The risk management techniques allow the corporates to increase their use of company’s debts.
• Maintain the company’s optimal capital budget over time.
• Decrease costs and risks of borrowing through swaps options.
• Higher tax rates are reduced that result from fluctuating earnings.
• Costs related with the financial distress are reduced.
• Initiate compensation systems, which offer compensation for all managers mainly for accomplishing targeted earnings stability.
• Use their comparative advantages in hedging comparative to the hedging ability of individual investors.