Kolej Universiti Tunku Abdul Rahman Faculty of Accountancy, Finance and Business SEMESTER 2020/2021 BBMF 3073 Risk Management Tutorial 4 (Week 5)

KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

SEMESTER 2020/2021
BBMF 3073 RISK MANAGEMENT
TUTORIAL 4 (WEEK 5)
1. Using the financial information below, determine the company’s stress position in terms
of corporate failure. Additional information includes that the average share price for the
period was RM1.40.
Total current assets (TCA) 1,182,000

Total non-current assets
1,700,000
(TNCA)
Total assets (TA) 2,882,000
Total current liabilities (TCL) 736,000
Total non-current liabilities
883,000
(TNCL)
Total liabilities (TL) 1,619,000
Shareholders' equity (SE) 109,000
Retained earnings (RE) 1,154,000
Number of shares issued
100,000
( NSI)
Profit before tax (PBT) 245,000
Sales (S) 3,393,000
Inventory (1) 435,000
X1 = Working Capital (Total Current Asset – Total Current Liability) /Total Assets.
= (1,182,000-736,000)/2,882,000
=0.1547
X2 = Retained Earnings/Total Assets.

=1,154,000/2,882,000
=0.4004
X3 = Earnings Before Interest And Taxes/ Total Assets.

=245,000/2,882,000
=0.0850
X4 = Market Value Equity/Total Liabilities.

=(100,000*1.40)/1,619,000
=0.0865
X5 = Sales/Total Assets
=3,393,000/2,882,000
=1.1773
Z-score is (1.2*x1 + 1.4*x2 + 3.3*x3 + 0.60*x4 + 0.999*x5)

Z−Score=(1.2× 0.1547)+(1.4 × 0.4004)+(3.3 ×0.085)+(0.0865× 0.60)+(1.1773 ×0.999)
=0.1856+0.5606+0.2805+0.0519+1.1761
=2.2547
[(3-2.2547) / (3-1.8)]*100%=62.11%
Based on the result, the company is in the risk of financial stress as the Z-score of the company is
2.2347 which is 62.11% towards the bankruptcy risk.
2. Define financial risk, credit risk and currency risk.

Financial risk
Financial risk is the exposure to adverse events that erode profitability and in the extreme
case bring about business collapse.
Credit risk
A credit risk is the risk of default on a debt that may arise from a borrower failing to
make required payments.
Currency risk
It is the possibility that currency depreciation will negatively affect the value of one's
assets,investments and their related interest and dividend payment streams, especially
those securities denominated in foreign currency.
3. Discuss methods to implement financial risk management.
Develop financial discipline and internal control

A good financial discipline allows you to conform your spending and saving to the plans
that you have set to achieve your monetary goals and minimize financial loss. Second,
establishing an ethical environment and setting the tone at the top of the organization
allow each of the components to work together to create a comprehensive system capable
of deterring fraud, and preventing, detecting, and correcting problems based on an overall
assessment of risk and exposure.
Develop concise reporting tools

A concise reporting tool helps users to translate data into actionable information to
develop strategies against any potential financial risk.
Prepare cash budget

A cash budget involves a realistic assessment of how much money you will have coming
in during an upcoming period. Your determinations of how much money your business
has available to spend are based on these forecasts, forcing you to spend within your
means. It forces you to restrict discretionary purchases to items that you can pay for out
of the cash you have on hand to avoid overspending.
Purchase credit insurance

Trade Credit Insurance will protect your business with account receivable protection
against losses due to credit risks such as customer’s insolvency, bankruptcy and failure to
meet agreed payment terms and conditions. Thus, it gives you the confidence to grow
your business by minimizing your credit risk exposure and improving your financial risk
management. Monitor change in interest rate, inflation rate and exchange rate. Generally,
financial markets are volatile and unstable, and these could potentially result in losses for
businesses and investors. A well monitoring of interest rate, inflation rate and exchange
rate allow you to avoid financial risk and minimize the impact by quick responses.
4. Discuss any three qualitative factors that predict corporate failures.
Decline in industry
Industries that have experienced negative growth or stagnant due to a decline in demand
for one or more products for a variety of reasons. This includes, but is not limited to,
economic downturns, product downgrades or upgrades, and technological changes. For
example, the tape industry performed well before the launch of the CD, making the tape
industry a recession.
Poor in management quality
Poor quality management is the situation where quality falls behind. This could cost a
business more than just repairs, replacements, and refunds. They often end up losing the
trust of customers for future purchases as well. For example, like No customer support
for the product inquiries, turnover very high and also overstaffed.
Poor organization culture
A poor organisation culture can increase employee turnover because no one wants to
stick to it in their tragic place. If you understand culture outside the company, it may
become more difficult to attract new employees. For example, poor internal
communication, a lack of team spirit in the office can be toxic to a business.
5. Discuss how risk impact on the market value of a firm?

Management of risk is an integral part of good practice and quality management.
Learning how to manage risk effectively enables managers to improve outcomes by
identifying and analyzing the range of issues and providing a systematic way to make
informed decisions. So the primary objective of a business is to maximize the wealth of
its shareholders. For example, the companies regularly face the decision of allocating net
revenues (profits) between retained earnings and dividends or share buy-backs. A central
issue is the opportunity to invest retained earnings and the cost financing alternative. A
firm can finance new projects or investments through either internal (retained) or external
capital resources. Under the theory of perfect capital markets, a firm should distribute all
earnings it does not need in the immediate future and simply issue more equity to finance
new initiatives. However, in the real world, returning money to shareholders and
reissuing equity incurs transaction costs. Even worse, if a firm finds itself in financial
distress and needs external financing to keep operations a float, potential investors may
be unsympathetic in the price they charge for that financing. The high cost of such
distressed financing is an incentive to retain earnings as an internal capital cushion.

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KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN

FACULTY OF ACCOUNTANCY, FINANCE AND BUSINESS

Total current assets (TCA) 1,182,000

X2 = Retained Earnings/Total Assets.

X3 = Earnings Before Interest And Taxes/ Total Assets.

X4 = Market Value Equity/Total Liabilities.

Z-score is (1.2x1 + 1.4x2 + 3.3x3 + 0.60x4 + 0.999*x5)

2. Define financial risk, credit risk and currency risk.

3. Discuss methods to implement financial risk management.

Develop financial discipline and internal control

Develop concise reporting tools

Prepare cash budget

Purchase credit insurance

4. Discuss any three qualitative factors that predict corporate failures.

Poor in management quality

Poor organization culture

5. Discuss how risk impact on the market value of a firm?

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