4-2 Case Study Bryanna Olson

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4-2 Case Study: Assessing Financial Risks and Sales Growth Bryanna Olson Southern New Hampshire University Online FIN-320 Principles of Finance Professor Petty September 24, 2023

Systematic and unsystematic risk are terms that finance professionals use to talk about the different types of risks a business can come across. A systematic risk is the same as a non- diversifiable risk. This kind of risk is one that cannot be eliminated though diversification. An unsystematic risk is the same as a diversifiable risk, or the exact opposite of a systematic risk. A diversifiable risk is one that can be eliminated through diversification. Interest rate risk is a risk that a company can face regarding the value of a bond or other fixed-rate interest. This risk is the potential that a change in overall interest rates will reduce them (Chen, 2022). When talking about interest rate risk regarding McDonalds and their 2022 quarterly report, we can see that there was a 2% increase in their interest expense from the previous year. Economic risk refers to the potential for adverse changes in economic conditions that can negatively impact businesses, industries, and economies (Wallstreet Mojo Team, 2023). For example, inflation, political changes, and economic changes are things that can negatively impact a business. With the current state of inflation and the rise of prices across the world, people are spending less money eating out, resulting in lower revenues for the company. Credit risk is the probability of a financial loss resulting from a borrower's failure to repay a loan (The Investopedia Team, 2023). If McDonalds had loaned their employees or other people money, they are taking a credit risk. If the borrower wasn’t able to repay the loan form the company, they would have lost hat money and it would have resulted in financial loss. Operational risk summarizes the uncertainties and hazards a company faces when it attempts to do its day-to-day business activities within a given field or industry (Segal, 2023). Any and every business can and will be impacted by operational risks at some point in their business’ life.

Whether that be product loss, revenue loss, a lawsuit, or anything that could possibly happen to a business. For example, every time McDonald’s opens its doors, they are opening themselves to risk. Employees could get hurt on the job, customers could get hurt in the store, by the food, etc. and all of these are operational risks. If McDonald’s were to have a lower growth rate, the revenue and influx of money for the company would be lower and slower over the years until they finally hit a higher number. While this isn’t necessarily a bad thing, shareholders and stockholders may gain less money each year and be tempted to move on from the company in favor of a faster-growing company. If they were to have a higher growth rate, the company would grow very quickly and gain a massive amount of money in a short amount of time. Shareholders and stockholders may be more inclined to put more money into everyday operations to increase their ROI and continue to support the company.

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Resources: Chen, J. (2022, September 25). Interest rate risk definition and impact on bond prices. Investopedia. https://www.investopedia.com/terms/i/interestraterisk.asp The Investopedia Team. (2023, August 15). Credit risk: Definition, role of ratings, and examples. Investopedia. https://www.investopedia.com/terms/c/creditrisk.asp Segal, T. (2023, August 13). Operational risk: Overview, importance, and examples. Investopedia. https://www.investopedia.com/terms/o/operational_risk.asp Wallstreet Mojo Team. (2023, May 30). Economic risk - definition, example, types, advantage - wallstreetmojo. Economic Risk. https://www.wallstreetmojo.com/economic-risk/