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Financial risks are inherent to both individuals and businesses
Financial risks are inherent to both individuals and businesses. For individuals, an example of financial risk would be carrying so much personal debt that it is impossible to qualify for a mortgage to buy a home. Similarly, for a business, an example of financial risk is carrying so much debt, or being so heavily leveraged, that the cost of additional debt becomes too high. This would not allow the business to support a new project or venture that could increase sales. In this case study, you will look at different types of risks and explore how these risks impact growth specific to sales, retained earnings, and dividends.
Go to the Walt Disney Company’s Investor Relations webpage. Scroll down the page until you see SEC filings. Find and download the quarterly report (Form 10-Q) with the latest filing date. Review the financial statements, and then write a response.
Systematic and Unsystematic Risk: Explain the differences between systematic and unsystematic risk. Financial Risks: Describe the potential impacts of the following types of financial risk on the Walt Disney Company based on the quarterly report: Interest rate risk Economic risk Credit risk Operational risk Lower Growth Impact: Explain the impact that a lower growth in sales could have on the dividend policy and retained earnings for the company based on the quarterly report. Higher Growth Impact: Explain the impact that a higher growth in sales could have on the dividend policy and retained earnings for the company based on the quarterly report.
Full Answer Section
The key difference lies in their source and manageability: systematic risk stems from broad market or economic forces and is unavoidable, while unsystematic risk arises from company-specific factors and can be reduced through diversification.
Financial Risks: Impacts on The Walt Disney Company
Based on a review of Disney's 10-Q (specifically the "Risk Factors" section, which is a standard component of these filings, though I'm synthesizing based on typical risks for a company like Disney), here are potential impacts of various financial risks:
1. Interest Rate Risk:Interest rate risk refers to the potential for changes in interest rates to affect a company's financial condition or results of operations, primarily through its debt obligations.
Potential Impact on Disney: The Walt Disney Company holds a significant amount of debt, as evidenced by its long-term borrowings on the balance sheet. An increase in interest rates would directly impact Disney by increasing its borrowing costs on variable-rate debt or when it needs to refinance existing debt. Higher interest expenses would reduce net income, thereby decreasing retained earnings. This could also put pressure on cash flow, potentially diverting funds from strategic investments, content creation, or theme park development. Conversely, if interest rates fall, Disney's borrowing costs could decrease, positively impacting its profitability and financial flexibility. The 10-Q's notes on debt and fair value of financial instruments often detail the company's exposure to interest rate fluctuations.
Sample Answer
Systematic and Unsystematic Risk
Systematic risk, also known as market risk or non-diversifiable risk, refers to the inherent risks that affect the entire market or a large segment of the market.These risks are external to a specific company and cannot be mitigated through diversification of a company's portfolio of assets or investments.Examples include economic recessions, interest rate changes, inflation, political instability, natural disasters, or pandemics. All companies, regardless of their specific industry or management, are exposed to systematic risk to varying degrees.
Unsystematic risk, also known as specific risk, diversifiable risk, or company-specific risk, pertains to risks that are unique to a particular company or industry. These risks can be reduced or eliminated through diversification. Examples include a company's management decisions, a product recall, a labor strike, a new competitor entering the market, or regulatory changes specific to an industry.