How risk affect corporate financial strategy - Research Paper Example

How risk affect corporate financial strategyRisk is the probability of loss to occur. Corporate financial strategy is affected by various types of risks. This includes political risk. Conflicts and civil wars leads to massive loss of assets by companies. When there is conflict in a country, companies’ property are looted and others destroyed. Companies located in these countries suffer huge losses since it become hard to protect their investments. Nationalization of industries also poses political risk since companies’ lose their licenses; hence, they cannot continue to operate in these countries.

Governments may also increases taxes on companies, making it difficult for any company to continue operating. The second type of risk is interest rate. When higher interest rate is charged on loans, it makes it impossible for companies to fund their operations using loans. Due to high interest rate charged on loans, corporate may fix higher prices on good and services hence reducing the market share as consumer will shift to cheaper goods (Ehrhardt and Eugene 7).The third type of risk is credit risk.

This type of risk is most common in banking industry where borrower will fail to meet the obligation to repay the loan in the agreed terms. Other risks occur in book keeping where incorrect figures are entered. Failure of borrowers to repay their loans and errors in book keeping causes huge loses to banking industries. The fourth type of risk is business risk. This is the probability that an auditor will suffer loss to his professional practice. It also involves an auditor giving biased advice on the financial investment of a company (Ehrhardt and Eugene 10).

The fifth type of risk is reinvestment risk. These occur due to the payment of interest and principal at a lower rate than the original amount. Amortizing securities have a higher risk since principal and interest is paid monthly to the investors. The sixth type of risk is the default risk. This is the type of risk that occurs when interest and principal are not paid in a timely manner. Bond issued by corporationsis likely to be defaulted.The companies end up becoming bankrupt (Ehrhardt and Eugene 11).

Works CitedEhrhardt, Michael C, and Eugene F. Brigham. Corporate Finance: A Focused Approach. New York: South-Western [u.a., 2010. Print.