Ergonomics

Although business and financial jeopardize differ (one is concerned with the reputation of the unanimouss operations and the other with how c be chooses to finance its operations), oversight habituates financial leverage to affect the unbendables add happen exposure. As is explained in Chapter 21 on the woo of capital, management whitethorn reduce the souseds make up of funds by using financial leverage. However, increased use of financial leverage increases riskiness and raises the cost of funds. The problem facing management is to determine what conclave of debt and equity financing minimizes the cost of funds. That combination is the firms optimal capital structure and uses debt financing without excessively change magnitude the firms financial risk. Business and financial risk are firm specific and are the source of unsystematic, diversifiable risk. As is illustrated ulterior in this chapter, the construction of a diversified portfolio reduces diversi fiable risk. This reduction occurs because the events that decrease the sound reflection on one essence may increase the unsay on another. Notice at that place is little relationship amid the returns on the item-by-item assets; hence the summon unsystematic risk.

The affirmable beneficial effect of combining variant assets in a portfolio may be intuitively grasped by considering the purchase of the stocks of an airway and an anele driller (for example, United Airlines and Schlumberger). Higher grating oil prices may reduce the earnings of the airline hardly increase the profits of the drilling operation. Lower oil prices may have the opposite impact; thus, combining the stocks of these two firms go away redu! ce the risk associated with the portfolio. Of course, the risk associated with each case-by-case asset remains the akin, but from your perspective, the risk associated with the portfolio is what matters and not the risk associated with the individual asset. Although the previous illustration applies to an individuals portfolio, the same impression applies to...If you want to get a full essay, point it on our website: OrderEssay.net

If you want to get a full information about our service, visit our page: How it works.