FIN 320 Module 4 Case Study PDF

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Southern New Hampshire University FIN-320-T6127 Principles of Finance 21EW6 Module Four Case Study Donna Atkins July 19, 2021

2 When assessing a company’s financial health, there will be many levels of data mining and analysis to determine the risks that investors would incur. When looking at company, there are two types of risks to evaluate, systemic and unsystematic. Systematic risk is unplanned and normally cannot be avoid. “Systematic risk is inherent to the market as a whole, reflecting the impact of economic, geo-political and financial factors” (CHEN, 2021). An example of this would be the Covid-19 pandemic that has rocked our nation along with the world, with devastating economic impacts to company’s and families. Where unsystematic risk can be lessened by diversification and the impact of the loss would be very specific in an industry. A way to the industry measures risk is by its beta which looks at the entire market and how strained the investment is. To fully understand the financial health of a company many factors come into play along with systematic and unsystemic risk, the financial risk, lower growth and higher growth all go into evaluating a company’s financial wellness.

Systematic and Unsystematic Risk Systematic risk affects the entire market of economic and financial markets, including geo-political. The biggest challenge with systematic risk is how unpredictable and company’s find it challenging to avoid. This type of risk “incorporates interest rate changes, inflation, recessions, and wars, among other major changes”(CHEN, 2021). Investors can help minimize the risk by ensuring their portfolios have a “variety of asset classes, such as fixed income, cash and real estate” (CHEN, 2021). The key for a company to lessen the risk is by making sure the company has a diversified it’s investments.

3 Unsystematic risk targets a specific type of business or industry. A way to reduce this type of risk is by diversifying investments in many industries. By taking this strategy on, it will reduce the risk to the investors. An example of unsystematic risk is the company Enron where it fraudulently used avenues to “hide the money in special purpose vehicles, and they used special purpose entities” (SEGAL, 2021) This company shocked wall street on its stock price that was over $90 dollars to less than $.30 when they filed bankruptcy. Another example is when a company is unionized, and the union decides they will strike is the company does not meet their needs at the bargaining table or if a company has to do a recall on one of its products like the Takata airbags they starting with only affecting a few models and years and grew to over millions and several automakers.

Financial Risks In the case study of SciTronics Assessing a Company’s Future Financial health there are four specific financial risks that impact its overall financial health. The first one is interest rate risk, this is “risk that arises when the absolute level of interest rates fluctuate” (NORRIS, 2021) Interest risk is from the interest rates going up and down which direct impact fixed-income securities. Securities that are affected the most are bond prices, as when interest rates raise the value of the bonds fall (NORRIS, 2021) and this goes both ways. SciTronic Company in 2005 went from interest expenses at $1,000 and to $2,000 in 2006 to 2008. When interest rates increase, the company’s returns will be less profitable for its investors. SciTronics a medical device company in the manufacturing industry, shows their Times interest earned is lowering this demonstrates

4 the company’s ability to pay debt down when looking at their income. The credit risk is what a lender takes on; not knowing for sure it the borrower will be able to repay the loan. If the SciTronic’s becomes a credit risk, it could potentially impact them financially in the future where lenders may be less willing to loan them money, which have a direct impact on their ability to reinvest into their company to grow. To understand the credit risk in this case study, look at the accounts receivable turnover ratio along with the collection period of day for debt from 2005 at 43 days to 2007 at 232 days. This shows the company is having trouble repaying their loans. Companies with a higher credit risk will end up with higher interest rates on their loans and even balloon payments. Operational risks are challenges that a company can face during their day-to-day business, such as Florida with hurricane season. This is an operation risk that is out of the control of a business but business can take many steps to ensure operational success. When natural disasters like a hurricane impacts a company it can have a large impact on their overall all financial fitness.

Lower and Higher Growth Impact A dividend policy is what companies set up to use as their model of how it will payout to their investors, the shareholders. If the company had lower growth in sales, this could impact how much dividend they would be able to give to the shareholder and depending on how low, they could end up not providing any dividends. Each year, companies like SciTronic provide a projection of what they feel the company will be able to payout in dividends. However as we have seen in the stock market roller coaster, a company may forgo giving dividends in order to supplement the financial need of the

5 company in its operations and debt. This type of move would reflect a decrease in the value of the stock but an increase in retained earnings. This strategy is to allow for the company to move forward on projects and increasing growth in the company. In the end the shareholders will benefit even more after this redirection of funds. If SciTronic makes a higher growth in sales, the company would be able to meet their projected goal of dividend payout and could even give a higher dividend return for it’s shareholders. SciTronics can provide its dividends in the form of cash or the option of reinvesting it back into the company by buying more stock. When a company has higher growth in sales, creates higher retained earners, and companies can take the increase in money and reinvest it back in the company for overall company growth. When companies have a high growth in sales it provides the company with the need cash flow and limits the need to borrow money.

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Reference: CHEN, J. (2021). Systematic Risk Definition. Retrieved 20 July 2021, from https://www.investopedia.com/terms/s/systematicrisk.asp#:~:text=mitigated

6 %20through%20diversification.,While%20systematic%20risk%20can%20be %20thought%20of%20as%20the%20probability,a%20specific%20industry %20or%20security. (CHEN, 2021) Bragg, S., & Bragg, S. (2021). Unsystematic risk definition — AccountingTools. Retrieved 21 July 2021, from https://www.accountingtools.com/articles/unsystematic-risk.html (Bragg & Bragg, 2021) SEGAL, T. (2021). Enron Scandal: The Fall of a Wall Street Darling. Retrieved 21 July 2021, from https://www.investopedia.com/updates/enron-scandal-summary/ (SEGAL, 2021) NORRIS, E. (2021). Managing Interest Rate Risk. Retrieved 21 July 2021, from https://www.investopedia.com/articles/optioninvestor/08/manage-interestrate-risk.asp (NORRIS, 2021)...