How Risk Affects Corporate Financial Strategy - Coursework Example

According to Bender and Ward (2012), the goals of companies are to create wealth or value for the investors while meeting the needs of other stakeholders. The corporate financial strategies involve obtaining funds required to meet business needs and investing those funds in the organization to create value for the investors. Companies are exposed to various risks, and the success or failure of these businesses is determined by the efficiency with which the business managers respond to the various risks (Bender & Ward, 2012). Various risks affect the strategies used by the corporate managers in relation to effective financial planning to meet organization needs regarding financing, capitalization, budgeting, and risk management. The perception of various risk influence corporate financial strategies in order to minimize risk and maximize returns. This document focuses on various types of risks facing businesses and their effects on corporate financial strategy.

Business risk

            This is the uncertainty that the organization may obtain lower profits than anticipated in case of unforeseen events occurring. For example, when sales volumes decline, the cost of inputs increases, the economic climate, or government regulations change they may result in a loss instead of anticipated profits (Bender & Ward, 2012). In a case of high business risks, the corporates may finance business activities with capital bearing less debt ratio to ensure they can meet financial obligations whenever they are due.

Credit risk

            Credit risk is the risk that the borrower may fail to repay the borrowed amount and interest charges when they are due. Lenders may incur additional costs to insure their loan portfolios in order to minimize the loss or borrowers are required to use security or guarantees before they acquire the loan (Bender & Ward, 2012). This affects corporate financial strategy especially when the business does not have to tie capital in security assets. They may have to raise funds through other means other than by borrowing funds.

Interest rate risks

            This is the risk that arises due to the fluctuation of interest payable to the stocks. It can affect corporate financial strategy whereby investors may refuse to commit buy stocks in a particular market due to fluctuations in interests for fear of losing the value of their invested stocks (Bender & Ward, 2012).

Political risks

            These are risks investors face due to political instabilities in the countries of operations. It can affect corporate investment decisions whereby the businesses if the managers cannot take enjoy opportunities available in certain countries due to political unrest for fear of losing their investments (Bender & Ward, 2012).

Default risk

            This is the risk that the business may not be able to settle its debts obligations. In such a case, the corporate finance managers may have to look for an alternative source of funds or forgo the plan for which the funds were required (Bender & Ward, 2012).

Reinvestment risks

            This is the financial risk the investors face because the investment in stock may be discontinued in the future or may not be offered at the current interest rate (Bender & Ward, 2012). Therefore, the corporate managers may have to look for a less attractive investment to commit their resources in case the current investment of a stock is canceled.