Question

MINI CASE Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc. (TS), a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The firm's CEO, Bill Stooksbury, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on the pressing need for companies to institute enterprise risk management programs Because no one atTennessee Sunshine is familiar with the basics of enterprise risk management, Stooksbury has asked you to prepare a brief report that the firm's executives could use to gain at least a cursory understanding of the topics. To begin, you gathered some outside materials on derivatives and risk management and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the paper is to use a question-and-answer format. Now that a. Why might stockholders be indifferent to whether or not a firm reduces the volatility b. What are six reasons risk management might increase the value of a corporation? the questions have been drafted, you have to develop the answers. of its cash flows? c. What is COSO? How does Coso define enterprise risk management? d. Describe the eight components of the COSO ERM framework. e. Describe some of the risks events within the following major categories of risk: (1) strategy and reputation, (2) control and compliance, (3) hazards, (4) human f. What are some actions that companies can take to minimize or reduce risk g. What are forward contracts? How can they be used to manage foreign exchange risk? i. It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in resources, (5) operations, (6) technology, and (7) financial management. h. Describe how commodity futures markets can be used to reduce input price risk June to raise capital for an expansion. Currently, the firm can issue 20-year bonds with a 7% coupon (with interest paid semiannually, but interest rates are on the rise and Stooksbury is concerned that long-term interest rates might rise by as much as 1% before June. You looked online and found that June T-bond futures are trading at 111'25. What are the risks of not hedging, and how might TS hedge this exposure? In your analysis, consider what would happen if interest rates all increased by 1%. j. What is a swap? Suppose two firms have different credit ratings. Firm Hi can borrow fixed at 11% and floating at LIBOR + 1%. Firm Lo can borrow fixed at 11.4% and floating at LIBOR + 1.5%. Describe a floating versus fixed interest rate swap between firms Hi and Lo in which Lo also makes a “side payment" of 45 basis points to Firm

Answer 1

ANSWER:

a)

(i) The investors can reduce through portfolio diversification  

(ii) The investors can reduce through their own use of derivatives

b)

SIX REASONS FOR RISK MANAGEMENT:

(i)  Increasing the usage of debt capacity

(ii) Increasing the management of capital budgeting at overtime

(iii) Making financial distress through avoiding the costs

(iv) The ability of the individual investors in hedging are relatively utilized to make comparative advantages in "hedging"

(v) Making fluctuations in earning through reduction of tax

(vi) Achieving the stable earnings make initiative compensations program to their managers and give reward to them.

c)

COSO : Committee of Sponsoring Organizations of the Treadway Commission

RISK MANAGEMENT:

(i) Company-wide Objectives

(ii) Process-level Objectives

(iii) Risk Identification and Analysis

(iv) Managing Change

d)

Eight components of COSO ERM:

(i) Internal Environment

(ii) Objective Setting

(iii) Event Identification

(iv) Risk Assessment

(v) Risk Response
(vi) Control Activities

(vii) Information and Communication

(viii) Monitoring

NOTE: " ONLY FIRST FOUR SUBPARTS ARE ANSWERED"

KINDLY REPOST REMAINING SUBPARTS IN THE OTHER QUESTIONS AND I WILL ANSWER THE.

THANK YOU