he chart below contains a description of Jack Company's top risk, an inherent risk assessment, three risk response alternatives, and a residual risk assessment for each response alternative. Also, Jack's management accountant estimates that the incremental cost of implementing risk response A is $2,600,000 and the incremental cost of implementing risk response B is $1,000,000. Risk Inherent Risk Residual Risk Likelihood Impact (on operating costs) Risk
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
he chart below contains a description of Jack Company's top risk, an inherent risk assessment, three risk response alternatives, and a residual risk assessment for each response alternative. Also, Jack's
| Risk | Inherent Risk | Residual Risk | |||
| Likelihood | Impact (on operating costs) | Risk Response Alternatives | Likelihood | Impact (on operating costs) | |
| Lose top employee talent to competitors | 50% | $10,000,000 | A: Improve Jack's employee training program | 40% | $3,000,000 |
| B: Improve Jack's employee compensation and benefits package | 20% | $8,000,000 | |||
| C: Take no action | 50% | $10,000,000 |
The residual risk for Jack Company associated with risk response alternative B is:
a.$5,000,000.
b.$1,000,000.
c.$1,600,000
d.$3,200,000.
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