Business
workshop MCFRM creating value?RM motivationto smooth the earning (why important : to avoid the underinvest problem. in general to increase flexibility so you don’t miss good investment opportunity)underinvest problem: already high level of debt, shareholders would reject low risk projectsasset subst: shareholders exchange low risk projects for high risk projects. earning do risk management to be able retained earnings, because dabt is costly—transaction costs—information asym—monitor coststo reduce the discount rate risk aversion: manage risk averse their wealth is tied to firm value they prefer hedging taxes(convex: that is why we do hedging to avoid the disproportional tax payment)- financial distress costs hedge to avoid this
MM(1958) 1. FV is independent of capital structure 2. costs of equity (increase) as D/E increase Perfect marketNo competitionNo transaction costs easy access to capital marketseveryone can access to the same information action rationalNocco (2006)enterprise risk management : considering all the risk of the entire corporation2 benefits(micro and macro)micro:risk return take-off macro: take up more business risk by managing financial riskfinancial risk/business risk(non-core risk and core risk)(business risk, core risk, is about the business itself and financial risk, non core risk,is about adding debt to your capital structure and how this is affecting shareholders)