Systematic risk refers to therisk that faces all the firms operating in a particular industry. Systematicrisk is not diversifiable as it comprises of risks that are unavoidable by allthe companies in the sector. For instance,these hazards can include such aspower shortages, inflation or change in government regulations in a countrywill definitely affect a company.
It is therefore clear that there is no firmin the industry, which can prevent the systematic risks from occurring, neithercan the company diversify from the risks (Marshall, 2015).Systematic risk issometimes referred to as volatility and is measured using the risk factor,known as the Beta. Potential investors can use the weighted beta factor for thebusinesses operating within a particular sector, to determine whether aninvestment in a specific industry, is worthwhile (Marshall, 2015). The Press Metal Bhd is a company based in Malaysia and mainlyoperates in two sectors. The sectors are the manufacturing of the iron sheetsand the trading of the same. The first primary examples of systematic risksthat the firm is facing is inflation risk.
Inflation means increasing the pricelevel, which directly increase the cost for consumers.The company will losstheir purchasing power during inflation period as the cost of raw materialsbecome higher.The cost of raw materials and the entire cost of production willgo up by a more significant margin, than it is, in the current situation. Forexample, during inflation period,the prices of aluminum has increasecontinuously, average price of aluminum have closed to $1900 per metric ton inthis year,around 18% higher than average aluminum prices last year. This areinfluenced by the supply and demand of aluminum in china, as china is the worldlargest producer and consumer of metal.Next, currency risk is also one of the systematic risk that thefirms is facing. It also referred as foreign exchange risk.
This is usuallywhen exchange rate become volatility that will affect the business’sperformance. As the company have conducted its business in an internationalstatus that include Asia, South East Asia, Europe and Americans. Thus, theyneed to convert Malaysia Ringgit (RM) into a foreign currency to enable to runtheir business. But the weakening of RM against other foreign currency willinfluence the profitability of business during economic downturn or the valueof RM relative to become smaller when converted back to RM during economicrecessions in that country. Therefore, it is essential for the company to usinghedging method to mitigate the currency risk.
Unsystematic risks refer to therisks that affect a particular firm, in a specific industry of operation(Marshall, 2015). It is considered controllable by a company. It is possiblefor the company to fully take charge of the unsystematic risks by making wiseinvestment decisions, which will help the firm to diversify its portfolio. Theunsystematic risks that a firm may face include the business risk, operationalrisk, the product risk, financing risk, credit risk and liquidity risk. Consequently,if the management of such a corporation makes a prudent decision, the companycan be able to diversify such risks mainly by investing in diversifiedportfolios. The investment in diversified portfolios enables the business thecompany to offset the risks it may be facing in one of the investments it hasmade, such that, when one sector fails, the firm will still be in a position torun. The Press Metal BhdCompany also face liquidity risk, Liquidityrisk is a risk that a company or bank is not able to meet short term financialneeds. This usually occurs when a company is unable to convert an asset intocash without making loss.
At that time , there are few buyers or an inefficientmarket and the real value of the asset cannot be sold hence the company ends upselling at a loss to meet its financial demands. For example, a $800,000 home without buyers.The house has value but there are no interested buyers in the real estatemarket. This may end up selling the home at a lower price so as to meet thefinancial needs. In better economic times, the home may even be sold at ahigher price but the company ends up making loss thus incurring liquidity loss.Another unsystematic risk that the company face is the credit risk. Credit risk can be defined as the risk whichoccurs when a borrower fails to make payments on any debt making the lenderincur losses in the principal of the loan or interest attached to it. In otherterms, it is the probability that the borrower will default.
There is always a risk when a lender givesout loans that the borrower may not beable to pay the loan within the required period of time agreed. Banks and anyother financial lending institutions always face this problem since you are notsure about the client. It therefore requires certain factors to be consideredbefore one is given a loan so that the lender can be assured of paying theloan. The issuance of preference share enables thecompany to raise funds for the company, in return for the payment of thepreference dividend which is a constant or fixed amount. The advantage ofissuing the preference shares is that they do not have voting rights, andtherefore, they cannot have any dilutioneffect on the votes of the shareholders. Preference shares can be redeemable,to mean that they can be repurchased back by the company, after a certainperiod, or they can be irredeemable, to indicate that the company can neverrepurchase them. Besides that , the preference shares can also be convertible,such that they can be changed into ordinary shares after a specified period.
Advantages of preference shares can be that: such shares are given priority, inthe distribution of a company’s assets in case of liquidation, the shareholdersof such shares, enjoy the preferred dividend, which is issued at a constantrate per annum.The company may decide to acquire loans fromfinancial institutions such as the Islamic bank, or it may also choose to offerthe debenture certificates to persons who may be willing to subscribe to them,and in return, the firm acquires the required to finance its operation. Bankloans provide short, medium and long time financing to business and companieswhich are to be paid on certain interests. The banks require assurance that theloan will be paid and as such they want securities like mortgage or log book onpersonal assets. This will act as a collateral between the company and the loanso if the client fails to pay the loan, the financing institution may use thesecurity to get the loan. Overdrafts are more preferred for an upcoming comingsince they are more flexible in terms of payment and do not require collateral.Although an overdraft is more flexible to pay at the long run it becomes moreexpensive compared to long term loans hence the company needs to do goodevaluation before settling on these methods. A company may also decide to takedebentures which are mostly long term loans.
They are repayable on a fixed ratethough not all debentures since others do not have fixed date of return of thefunds. Debentures are more preferredthan loans they have a lower interest rate thus becoming easy to pay thanloans. They are also paid in future not like loans which are paid in a shortperiod after acquiring the loan. These loans together with debentures providefinances for the company to run its activities smoothly.
Debentures are alsoeasily sold in stock exchange markets and have fewer risks than things likeequities. This builds confidence to the company and prefers to go fordebentures to manage its operations of day to day activities. The loansrequires good management in its usage so that the company does not make losseswhen paying back loan by not achieving what the loan was planned to accomplish.Conclusion on thefinancing and benefits to companyLarge amount of money to thecompanyBank loans provide good amount ofmoney which the company requires to runits financial demands. This amount cannot be obtained from friends or savingshence the company becomes financially stable after getting bank loan.FlexibilityWhen the company gets the loan, it is required to make sure that theregular installments are paid on time so that there is good terms with thebank.
The bank does not follow to see how the loan is going to be used providedthe payments are paid on time thus the company is flexible to invest the loanin any field of business.Low interest ratesBank loans are cost effective in that they charge fewer interest ratescompared to credit cards and the company will make high profits thus end upearning more from the loan. This will in return reduce the costs of the companyand make more profit due to the few costs.Long-term fundsDebentures provide long-term funds to the company where the loan is paidover a long period of time and the company is in a position to pay the funds inthat given period. This is also convenient to the company which is able to planand know how the loan will be serviced within that period.Retained profitsA bank will require the borrower which is the bank to pay the principaland interest of the loan.
All the other profits the company makes from the loanbecomes profit and can be used to expand the company. This profit will beretained in the company for other expenses in the company. ReferencesWaemustafa, W.and Sukri, S., 2016. Systematic and unsystematic risk determinants of liquidityrisk between Islamic and conventional banks.Bansal, P.
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