FIN 320 MODULE 4 CASE STUDY

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Emily Miller FIN-320-R2680 Professor Cai Southern New Hampshire University November 16, 2023

Systematic risk refers to the risk inherent to the entire market or market segment. Other terms for systematic risk are undiversifiable risk, volatility risk and market risk. Systematic risk does not affect just a certain stock or industry but the entire market. Unsystematic risk is the risk that is unique to a specific company or industry. Other terms for unsystematic risk are nonsystematic risk, specific risk, diversifiable risk, and residual risk. Systematic risk is caused by factors that the company has no control over. Common examples to events that cause systematic risk are global recessions, geopolitical risk, global pandemics, natural disasters, and inflation. Due to the stock market being unpredictable, systematic risk always exists. (IBF, 2016) One example of systematic risk is the Covid-19 pandemic as no one could predict its occurrence or how it affected the worlds economy. If a portfolio contains different types of assets such as stocks, real estate or treasury bonds, these investments can all be affected in different ways, which will lower the total risk. (Cautero, 2019) Unsystematic risk can occur due to regulation changes within one industry, new competitors, recall of products, and fraudulent financial statements. ( Unsystematic Risk , 2022) There are financial risks that need to be reviewed prior to making an investment: Interest rate risk, Economic risk, Credit risk, and Operational risk. When interest rates rise, the value of a bond or other fixed-income investments in the secondary market will decline. (Chen, 2022) When interest rates rise, the cost of borrowing money also increases. According to McDonald’s most recent 10-Q form, they currently hold $37.2 million in long-term debt. Also, according to the 10-Q form, McDonald’s also recognized a $5.7 million gain on the fair value of interest rate swaps. Interest expense increased 11% at the end of their quarter for September 30, 2023.

Economic risk refers to the potential for adverse changes in economic conditions. These conditions can have a negative impact on businesses, industries and economies. (Ramachandran, 2019) Economic risks can affect the companies demand for products and services, the whole business environment. If the economy was to start seeing a decrease, McDonald’s could see a decrease in income due to consumers not purchasing food as frequent and spending more at local grocery stores. Even though this in previous years, Covid-19 hit the company tremendously and they reduced costs and executive officers reduced their salaries. ( Update on COVID-19 Impact to Our Business , 2020) Credit risk refers to the probability of a company losing funds from borrower’s failure to repay their loans. ( Credit Risk: Definition, Role of Ratings, and Examples , 2023) McDonald’s currently has $37.2 million in long-term debt as mentioned earlier; if they were to default on their obligations to repay their loans, the lenders would be incurring credit risk. As of September 30, 2023 McDonald’s was required to post $103.6 million of collateral due to the negative fair value of certain derivative positions per their 10-Q. Operational risks happen due to the lack or failed processes, policies, systems or events that disrupt business operations. This can include employee errors and fraudulent criminal activity. (Morgan, 2022) Operational risk can have a negative impact on their reputation if the company is not handled appropriately. Dividend Policy: To conserve cash and conserve fiscal stability, the company may take to reduce or exclude dividend disbursements. This would impact shareholders who count on dividends for profit.

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Retained Earnings: Lesser excrescency in deals can influence in smaller retained earnings for the company. Retained earnings represent the portion of gains that are reinvested back into the business.

References Cautero, R. (2019, December 2). Systematic Risk: What Investors Need to Know . SmartAsset. https://smartasset.com/investing/systematic-risk Chen, J. (2023, February 22). Unsystematic Risk . Investopedia. https://www.investopedia.com/terms/u/unsystematicrisk.asp Fontinelle, A. (2023, May 3). Systematic Risk . Investopedia. https://www.investopedia.com/terms/s/systematicrisk.asp#:~:text=Systematic%20risk %20refers%20to%20the IBF. (2016, January 29). Systematic and Unsystematic Risk . Institute of Business & Finance. https://icfs.com/financial-knowledge-center/systematic-and-unsystematic-risk Unsystematic risk . (2022, May 20). AccountingTools. https://www.accountingtools.com/articles/unsystematic-risk.html Chen, J. (2022, September 25). Interest Rate Risk . Investopedia. https://www.investopedia.com/terms/i/interestraterisk.asp Credit Risk: Definition, Role of Ratings, and Examples . (2023, August 15). Investopedia. https://www.investopedia.com/terms/c/creditrisk.asp#:~:text=%25%2025%25%200%25- Morgan, L. (2022). What is Operational Risk? Definition from SearchCompliance . SearchSecurity. https://www.techtarget.com/searchsecurity/definition/operational-risk Ramachandran, A. (2019, October 20). Economic Risk (Definition, Examples) | Top 3 Types of Economic Risk . Wallstreet Mojo. https://www.wallstreetmojo.com/economic-risk/ Update on COVID-19 Impact to Our Business . (2020, April 8). Www.mcdonalds.com. https://corporate.mcdonalds.com/corpmcd/our-stories/article/covid19-bus-impact.html

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