FIN 320 4-2 Case study
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Uploaded by jamieastudillo469
Jamie Astudillo
FIN 320 Principals of Finance
Southern New Hampshire University
4-2 Case Study: Assessing a Company’s Future Financial Health
It's critical to take into account all potential liabilities and risks when evaluating a
company's ongoing financial health in order to develop successful strategies and objectives.
Finance carries risks at all times, so every choice must be carefully considered in light of how it
will affect the overall financial health of the business. Every decision has an effect on multiple
areas, so even company employees and finance analysts/managers should always take risk into
account. A business may encounter two different kinds of risk: unsystematic risk and systematic
risk.
Every risk has a unique effect on the business’s ability to maintain its financial stability. The
result of external, uncontrollable factors that are not specific to any one industry or security,
systematic risk impacts the entire market and causes price fluctuations across all guarantees.
Every business endeavor involves some level of risk, and effectively managing that risk
is essential to the operation and success of the enterprise. On the other hand, the management of
a company has varying degrees of control over risk. Certain risks are largely out of the
company's control, while others can be managed. Often, an organization's best course of action is
to anticipate potential hazards, evaluate the possible effects on its operations, and have a strategy
in place for handling unfavorable situations. In the case study, the business needed $126 million
in outside funding to sustain a 25% increase in sales. The increase in assets will make it more
difficult for the business to obtain outside funding, and it may be difficult to achieve the 25%
increase in sales if the interest rate is not low or at a level that the business can afford. On the
other hand, they could lend enough to finance an increase in comprehensive benefits in order to
meet goals if interest rates were low and lending money to advance is not expensive. Economic
risk is the chance that changes in macroeconomic conditions could affect the prospects of an
investment or a company operating in a foreign or domestic market. All of these activities,
depending on the necessary laws and regulations, can have a favorable or negative effect on a
business. Credit risk, or the risk businesses take on when they give customers credit, is another
related risk. The company may have to sell one of its assets to cover a financial obligation if it is
unable to meet. That suggests that their obligations exceed their assets, which is disastrous for
any company's bottom line. Operational risk refers to the various risks that are associated with a
company's routine business operations.
Less sales growth may have an impact on the company's retained earnings and dividend
policy since it won't require outside funding to help offset the increase in liabilities. For instance,
SciTronic wouldn't require outside funding if sales increased by 5% in order to maintain their
liabilities below their assets. Higher sales growth, however, might have an impact on SciTronics'
dividend policy and retained earnings because they would require outside funding to help offset
the cost of rising liabilities. Based on these three points and the company producing a 25%
increase in sales, they will require an external financing company. For example, in 2008, the
company have witnessed its return on equity increase from 8.11% in 2005 to 18.66%, increasing
10.56%. All in all, shareholders are pleased, and the company can secure more earnings with
invested money from its shareholders. With dividends compensated to shareholders, the
remaining earning after paying the returns to retained earnings means that the company is
continuing successfully.
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