Chapter 23 Mini-Case: The Economic Ordering Quantity (EOQ) model is a concise me

Question

Chapter 23 Mini-Case:

The Economic Ordering Quantity (EOQ) model is a concise method for maximizing the value of a company’s inventory. It allows managers to quickly assess the overall costs of their inventory by specifying the costs of both ordering and carrying inventory. While there are other, more in-depth methods of inventory evaluation, this model provides a solid overview of inventory-related costs. This Mini Case activity allows you to use the EOQ model to evaluate the inventory of a company and make recommendations based on your findings.

MINI CASE

Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., 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 smaller companies to institute corporate risk management programs. Since no one at Tennessee Sunshine is familiar with the basics of derivatives and corporate 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 corporate 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 the questions have been drafted, you have to develop the answers.

a. Why might stockholders be indifferent to whether or not a firm reduces the volatility of its cash flows?

b. What are six reasons risk management might increase the value of a corporation?

c. What is corporate risk management? Why is it important to all firms?

d. Risks that firms face can be categorized in many ways. Define the following types of risk:

(1) Speculative risks

(2) Pure risks

(3) Demand risks

(4) Input risks

(5) Financial risks

(6) Property risks

(7) Personnel risks

(8) Environmental risks

(9) Liability risks

(10) Insurable risks

e. What are the three steps of corporate risk management?

f. What are some actions that companies can take to minimize or reduce risk exposures?

g. What is financial risk exposure? Describe the following concepts and techniques that can be used to reduce financial risks:

(1) Derivatives

(2) Futures markets

(3) Hedging

(4) Swaps

h. Describe how commodity futures markets can be used to reduce input price risk.

i. It is January, and Tennessee Sunshine is considering issuing $5 million in bonds in 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%.

I need all question answered A thru H Please! like ASP!

Explanation / Answer

Part A

In case the volatility underlying the flow of cash is not resulted due to systematic risk then the shareholders are in the position to terminate the risk underling volatile flow of cash by undertaking portfolio diversification. The company is required to pass on the cost of hedging to the investor if it decided to hedge away the risk related with the cash flow volatility. Investors that are sophisticated are entitled to hedge the risk themselves.

Part B

The reason for increase in the firm’s value by undertaking risk management are decreasing the higher taxes that arise due to fluctuation in the earnings, reduction in the cost as well as risk of borrowing by undertaking swaps, utilization of the comparative advantage underlying hedging relative to the hedging ability of the investor individually, Cost related with financial distress must be avoided, maintenance of the capital budget over time and increased use of debt are all such reasons that helps increase the value of the firm.

Part C

Management of corporate risk refers to managing the events that are unpredictable and possess adverse or bad consequences for the company. Since, corporate risk management involves decreasing the outcome of risk to a certain point where the financial position of the firm is safeguarded against the adverse effects of the risk, hence, it is ascertained that this function is of utmost importance for a firm.

Part F

In order to reduce or minimize the exposure to risk companies can take several actions such as avoiding the activities that contributes towards increase the risk, action must be taken to reduce the magnitude pertaining to the loss related with the adverse events, action must be taken by the company for reducing the probability of the adverse event occurrence for example replacement of old electricity wires to decrease the probability of fire or other hazards, companies need to reduce financial and input risk by purchasing derivative contracts,, companies are required to purchase insurance policy and transfer the risk by making payment towards the periodic insurance premiums.

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