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Theory suggests that undertaking risk management may increase the value of a company if the benefits accruing from the risk management activity are more than the costs involved in managing the risks. For example, smoothing the volatility of profits may make it easier for Morada Co to plan and match long-term funding with future projects, it may make it easier for Morada Co to take advantage of market imperfections by reducing the amount of taxation payable, or it may reduce the costs involved with incidences of financial distress. In each case though, the benefits accrued should be assessed against the costs involved.
Question ) I cannot understand the logic behind that “it may make it easier for Morada Co to take advantage of market imperfections by reducing the amount of taxation payable, or it may reduce the costs involved with incidences of financial distress.”
Could you please elaborate on it?
Thank you very much.
TIt is a bit of a ‘woolly’ statement by the examiner (and as he writes, it is an open-ended answer and there are no marks specifically allocated for that sentence).
However what he is getting at is the by being able to plan better and having less volatility of profits there is potential to be able to plan the tax position better and to reduce the risk of there being possible collapse of the company, which in both cases stands to give benefits.
Thank you very much !!! May I ask what is the best way to study for the written questions?
I have watched your lecture twice but I guess I have to do it again.
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