M.Draine 4-2 Case Study

4-2 Case Study: Assessing Financial Risks and Sales Growth Mykalah Draine Southern New Hampshire University FIN-320-H7761: Principles of Finance Instructor Jennilene Stefoni Sunday, September 24, 2023
A company's financial health explains the success and failure based on the multiple amounts of data and the analysis of the risks that the investors may or may not encounter. There are different types of risks to evaluate: systematic and unsystematic. Systematic risks are the "component that measures the contribution of the investment to the risk of the market portfolio" (Titman et al., 2017). Essentially systematic risks refer to the risk to the entire market (Chen, 2023). Unsystematic risks are the "element of risks that does not contribute to the risk of the market portfolio" (Titman et al., 2017). In other words, unsystematic risks are specific to a single company and can be reduced by diversifying one's investments (Ross, 2023). Systematic risks are categorized into different areas: purchasing power risk, interest rate risk, and market risk. Unsystematic risks are categorized into different areas as well such as: financial risk and business risks. Interest rates vary and due to this factor, investors are exposed to the risk of changing values as interest rates cannot be predicted which essentially can change the value of a bond ( McDonald's 8.2.23 Quarterly Report , 2023). This is known as interest rate risk which affects bond prices either positively or negatively ( McDonald's 8.2.23 Quarterly Report , 2023). In order to protect themselves against unpredictable interest rates, McDonald's suggests using "treasury locks to hedge a portion of expected future cash flows" ( McDonald's 8.2.23 Quarterly Report , 2023). In terms of economic risks, there are many that businesses should be aware of. "Economic risk is referred to as the risk exposure of an investment made in a foreign country due to changes in the business conditions or adverse effect of macroeconomic factors like government policies or collapse of the current government and significant swing in the exchange rates" (Vaisya, 2019). With governments or markets possibly crashing and different policies, businesses should be mindful of decisions made, especially when exposed to other
foreign markets. "Of the $199 million of restricting costs incurred in the six months ended June 30, 2023, $62 million was recorded in the U.S., $72 million was recorded in the International Operated Markets segment and $65 million was recorded in the International Development Licensed Markets & Corporate segment, the majority of which was recorded at Corporate" ( McDonald's 8.2.23 Quarterly Report , 2023). With so many costs and investments, it would be beneficial to research the markets the business is expanded into. Credit risk is "the risk of loss as a result of default on a financial obligation" (Titman et al., 2017) which is also known as default risk. In other words, a loss occurs when the borrower fails to pay back the loan." At June 30, 2023, the Company was required to post $99 million of collateral due to the negative fair value of certain derivative positions" ( McDonald's 8.2.23 Quarterly Report , 2023). To avoid future instances such as this one, McDonald's would need to assess and research its suppliers' and distributors' credit rating to ensure that it is high to avoid negative impacts. Operational risks are the "cost overruns related to the firm's operations that are another source of volatility in corporate cash flow" (Titman et al., 2017). Without proper risk management, the financial health of a business can be affected. Failure due to improper procedures, policies, and systems are just a few examples of how problems can occur without proper management. McDonald's would need to ensure that plans are developed to accurately assess the operational risks that may face. With lower or higher sales growth, the dividend policy and retained earnings are affected. With lower sales growth, McDonald's would be at risk due to the decrease in overall income, retained earnings, etc. This means, as a result, the business would have to reevaluate its plans in order to ensure that the business still runs smoothly and what alternatives can be made to ensure
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