There are two members posts pertaining to this discussion could you come up with a thoughtful, well supported response for each member discussion....
There are two members posts pertaining to this discussion could you come up with a thoughtful, well supported response for each member discussion. They only need to be about half of a page to one page in length for each one. And cite references in support agreements of or arguments. Expand upon the original point or provide an outside source that illustrates it. You can always disagree as well [as long as it is done in a respectful manner]. Provide a counterpoint or outside source to refute the original comment.
Does Size Matter?
This is for a corporate finance course...
Most of the examples in the text are medium or large companies.
Think about the concepts of risk which are part of this section of the course in the context of the size of a firm. Would these change if the firm were large? Small? Medium-sized? Why or why not?
Provide an example in your post to add some specificity to your ideas.
Use APA format. Please use a good sources and cite accordingly for the example and to support the other question asked .
YOUR POST TO DISCUSSION:
Risk is incurred when an investor makes an investment for a goal of earning a profit. Risk can unfortunatly bring unexpected results that can cripple a firm that is not healthy enough to bear the risk. The size of the firm does indeed have a correlation with the amount of risk that can be taken on. There are different types of risk. Low risk which are and are associated with low potential results and high risk which are related to high potential results and these risks are also depending upon size of a firm. These risks are divided into different categories which are:
Systematic Risk – These type of risk are uncertainty in the market and it happens because of lots of fluctuations happened and because of fluctuations people make or lose money. Interest rates, wars and recession all affects systematic risks. It will be more if a company is big in size
Unsystematic risk – it is a type of uncertainty happened in a company and it can be minimized through diversification
Credit or default risk – This is a type of risk when a company is not able to pay interest or principal amount on the loan it had taken and it is also more when a bigger companies take huge loans and is not able to pay back and go bankcurropt
Country risk – this type of risk evolves in the country when a country is not able to honour its statements than it can hamper performance of companies or businesses within country
Political Risk – It happens when a government suddenly changes policies which leads to hamper the working of both form even it is a big or small
Taxes – Different type of taxes are levied on different firms on different accounts
Fees – Investors pay fees to buy and sell & certain investments. They pay fees and it will be more for bigger firms and less for smaller firms
Risk always changes and risk is largely dependent upon size of firms. Small companies or firms are more exposed and face more severe financial risks than the larger or bigger firms due to scale in economies in monitoring and information acquisition. Smaller firm pays higher interest rate and take lesser advantage of attractive discounts early on trade credit, liquid funds. Small or medium sized firms invest more in used capital because of credit constraints and hey are more sensitive to interest rate shocks. Larger firms generally can take on more risk due to there abundance of resources that give them the ability to make more investments with out “breaking the bank”.
References:
(n.d.). Retrieved March 7, 2015, from https://hbr.org/2012/06/managing-risks-a-new-framework
Business and Financial risk. (n.d.). Retrieved March 7, 2015, from http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/business-financial-risk.asp
Differences Between Business Risk & Financial Risk. (n.d.). Retrieved March 7, 2015, from http://smallbusiness.chron.com/differences-between-business-risk-financial-risk-100.html
MEMBER #1's POST TO SAME DISCUSION: D.s.
A firms risk and expected return on investments determine a firms value, therefore risk assessment is essential for finance managers to make financial decisions that will pay. The size of a corporation does have an effect on the risks an organization is willing or able to take. Larger corporations usually have more capital to “play” with and therefore can invest in riskier investments, as the total rate of return (loss) is easier to absorb for a larger company.
When determining investment risks investors tend to think of large firms as safe, however if we look at economic conditions the past few years we have seen these large companies fall. Some of the largest companies have been vulnerable to a slow economy and required controversial government bailouts. A perfect example of this would be the auto industry. The government loaned GM and Chrysler money (in exchange for shares) to keep them in business and offered customers incentives to encourage sales. The government invested 80 billion dollars, the shares were sold in May 2011, December 2013 and the remaining sold December 2014 (at a loss) the bailout cost taxpayers 9.2 billion dollars. (Amadeo, K) During economic slowdowns firms sometimes have to change business plans (reduce costs, to lower prices so they can remain competitive) to retain customers and/or meet market demands. Smaller firms have an easier time adapting to these changes, as most run on the lean side.
Most investors prefer larger firms; this is the problem smaller firms face when capital is needed to fund projects. Investors see smaller firms as too risky (the risk out-weighs the return) due to the fact that they are more likely to fail. Investors tend to overlook smaller firms for medium and large size firms.
Yes size does matter when ascertaining the risks involved in investments. I read an interesting aspect regarding size and risk, “size matters, but so does quality.” (Fisher Funds) Something to think about.
Works Cited
Amadeo, Kimberly. Auto Industry Bailout (GM, Ford, Chrysler) Why the Big 3 Needed a Bailout and What it Cost the US Taxpayer. US Economy http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm accessed 03/02/15
Large or small – does company size really matter? Fisher Funds. 10/05/09 http://www.fisherfunds.co.nz/uploads///6_Large_versus_small_10May09.pdf accessed 03/02/15
Gitman, L. Zutter, C. J. Principles of Managerial Finance. Fifth Edition. Pearson
MEMBER #2's POST TO SAME DISCUSION:
The varying sizes of companies does matter and make a difference when it comes to financial decisions regarding risk and return. The characteristics of risk and return are very important to a firms investors. Many times, in terms of the probability distributions of returns, we see that larger firms are characterized by probability distribution with positive expected means and relatively small chances of excessive large gains or losses. I believe that smaller firms attract investors who are attracted to either stimulating the local economy and or those who are attracted to the chance of gaining many times the amount risked along the investment with a smaller firm. Buying the stock of a high-risk new project or venture is an example. Also when dealing with smaller firms there is no beta used as a measurement of risk. Chapter 8 in our book tell s us that beta market risk only, a relevant measure only if you’re dealing with a large and properly diversified portfolio. Beta can only represent a part of the vitality of measured risk with smaller firms with moderate to small investors and portfolios; putting a small firm and its investors at risk due to lack of information. I would say that as a general rule of thumb, there is extra risk with smaller firms. Comparatively speaking, small company stocks act very differently than this of larger company stocks. Investors seeking diversification are going to be more focused on the correlation of returns between securities of a portfolio verses small company stocks that may in the long-run generate higher returns than those larger company stocks; however, the extra return is not free since they have higher risk.
