Henrietta was a risk taker while her son Freidrich wasn’t. What challenges or di

Question

Henrietta was a risk taker while her son Freidrich wasn’t. What challenges or disadvantages would a company have that was a risk taker in terms of cost of capital and investments?What about the challenges or disadvantages under Freidrich?Freidrich took over the family business and  although he truly believed in the superiority of his family chocolates, he was more concerned about profit margins and reducing risk. A few years after his mother's retirement, Freidrich announced that Wulfurt Family Chocolates was going public. Freidrich preferred to go public so he could pass on the risk to shareholders as well as raise capital to open up a factory.Henrietta, on the other hand, was a risk taker. When dealing with the expansion of Wulfurt Family Chocolates, Heirich often advised Henrietta to avoid certain projects because of the high required rate of return. Henrietta didn't mind the risk and sometimes authorized investments that had a 35% required rate of return. Luckily for her, the rapid company growth helped her achieve her returns.

Explanation / Answer

When a company is risk taker it put more risk in the system and source of finance. These types of companies believe in their business acumen, entrepreneuer spirit and effective projection of business model. For a risk taker company, cost of capital will be always high than risk non-taker company. People or investor put money in a business to get return and when the risk is low they expect less return but when the investor know that risk is less they will seek more return, hence cost of capital will be more.Chakllenges under Freidrich is that when the company will go to public, they have to share the profit with the shareholders, they will get more investment because people perceive that credit risk of listed company is more better than unlisted company. Another challenge for Freidrich will be consistent performance in the business and to provide financial numbers which will be favourable for investor sentiments else stock price will start falling and business will loose the worth.

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