final term risk management

However, by diversifying into portfolios, especially those incorporating negatively correlated assets like Stocks A and C, investors can potentially achieve higher expected returns with

Final-termRisk ManagementFull name: Le Gia Tien Vinh

Student code: 22070158Question 1:

Financial Indicators of ABT: (target company)

Days accounts receivable outstanding

107.958Days accounts payable

outstanding

252.774Required financing period 129.8

172.695Operating cash flow to capital

expenditures

-0.832 -0.072 -7.974 -1.751-0.706

3

Financial Indicators of CMX: (benchmarked company)

Days accounts receivable outstanding

107.958Days accounts payable

outstanding

252.774Required financing period 129.8

172.695Operating cash flow to capital

expenditures

-0.832 -0.072 -7.974 -1.751-0.706

3

I Liquidity Risk1 Current Ratio:

ABT's current ratio has remained relatively stable over the years, ranging from a high of 2.151 in 2019 to a low of 1.722 in 2021.

The ability to pay short-term obligations is maintained at an acceptable level, although there was a slight dip in 2021.

Compared to CMX, ABT's current ratio is approximately half, indicating weaker short-term solvency compared to CMX.

3 Days Accounts Receivable Outstanding:

ABT's days accounts receivable outstanding fluctuated but generally improved from 2019 to 2023.

Despite some difficulties in 2021, ABT's ability to collect receivables improved significantly compared to CMX.

4 Days Accounts Payable Outstanding:

ABT's days accounts payable outstanding increased slightly from 2019 to 2023.

outperformed CMX in this aspect.

5 Days Inventory Held:

ABT's days inventory held showed a significant increase until 2021, followed by a sharp decrease in 2022 and 2023.

While inventory management efficiency improved, it still lags behind ideal levels.However, ABT performs better than CMX in managing inventory.

6 Required Financing Period:

ABT's required financing period decreased significantly from 2019 to 2023, indicating improved self-sustainability in business operations.

In contrast, CMX's required financing period increased over the same period, indicating potential financial stability issues.

II Solvency Risk

1 Interest Coverage Ratio:

ABT's interest coverage ratio fluctuated but showed an overall improvement from2019 to 2023.

ABT consistently outperformed CMX in its ability to cover interest expenses.

3 Operating Cash Flow to Capital Expenditures:

ABT's operating cash flow improved notably from 2022 to 2023, indicating betterprofitability and sustainable growth.

ABT generated more operating cash flow compared to CMX, indicating stronger financial performance.

ABT's long-term debt ratio decreased slightly from 2019 to 2023, indicating reduced reliance on long-term debt.

ABT maintained a lower long-term debt ratio compared to CMX, indicating betterdebt management.

1 Return on Assets (ROA):

ABT's ROA fluctuated but showed improvement in recent years, outperforming CMX in terms of asset utilization for generating profits.

2 Return on Capital (ROC):

ABT's ROC fluctuated but demonstrated a generally upward trend, indicating more efficient use of capital compared to CMX.

3 Return on Equity (ROE):

ABT's ROE showed significant fluctuations but improved in recent years, reflecting better utilization of shareholder equity for generating profits compared to CMX.

Conclusion: ABT exhibits moderate liquidity risk, with improvements in short-term

solvency indicators It also demonstrates better solvency, profitability, and efficiency compared to CMX However, ABT still faces challenges in inventory management and maintaining stable profitability Overall, ABT shows promising financial performance and stability, positioning it favorably in the market.

# Calculate expected return

expected_return_portfolio1 =np.dot(probabilities returns_A, *

weight_portfolio1[0] +returns_B weight_portfolio1 * [ ])1

expected_return_portfolio2 =np.dot(probabilities returns_A, *

weight_portfolio2[0] +returns_C weight_portfolio2 * [ ])1# Calculate standard deviation

portfolio_std_deviation1 = np.sqrt(

np.dot(probabilities, ((returns_A -expected_return_portfolio1) * weight_portfolio1[0+

.(returns_B -expected_return_portfolio1) * weight_portfolio1[1]) 2))

portfolio_std_deviation2 = np.sqrt(

np.dot(probabilities, ((returns_A -expected_return_portfolio2) * weight_portfolio2[0+

.(returns_C -expected_return_portfolio2) * weight_portfolio2[1]) 2))

# Outputprint("Portfolio 1:")

print("Expected return:", expected_return_portfolio1)print("Standard deviation:", portfolio_std_deviation1)print("\nPortfolio 2:")

print("Expected return:", expected_return_portfolio2)print("Standard deviation:", portfolio_std_deviation2)This is the result:

Portfolio 1: Expected return: 8.54% Standard deviation: 9.09%Portfolio 2: Expected return: 7.60% Standard deviation: 1.90%

Analyzing the outcomes from Question A, we notice that Portfolio 1, with an allocation of 55% to Stock A and 45% to Stock B, demonstrates an expected return of 8.54% and a standarddeviation of 9.09% Meanwhile, Portfolio 2, consisting of 55% Stock A and 45% Stock C, showsan expected return of 7.60% and a significantly lower standard deviation of 1.90%.

These results reflect the impact of correlation on risk reduction through diversification InPortfolio 2, where Stocks A and C exhibit a negative correlation, the combined standard deviation is notably lower compared to Portfolio 1, which includes positively correlated assets like Stocks A and B This highlights the effectiveness of diversification in reducing risk when incorporating assets with contrasting performance trends.

In contrast, investing solely in individual assets amplifies the associated risks For instance, Stock A has a standard deviation of 9.09%, Stock B stands at 5.61%, and Stock C at 5.64% However, by diversifying into portfolios, especially those incorporating negatively correlated assets like Stocks A and C, investors can potentially achieve higher expected returns with lower risk, as demonstrated in Portfolio 2.

In conclusion, diversifying investments across various asset types, particularly those

with opposing fluctuations, can increase expected profits and reduce risk.

lifespan_current_machine = 25 # Lifespan of the current machine

cash_flow_new_equipment = 180000 # Net cash inflow per year for new equipment

growth_rate_new_equipment =0.07 # Growth rate of net cash flow for new equipment

initial_outflow = 20000 # Initial cash outflow for purchasing new equipment

discount_rate =0.05 # Discount rate# Calculate NPV for current machine

npv_current_machine = sum([cash_flow_current_machine ( *1

+ 1)])

# Calculate NPV for new equipment

npv_new_equipment = -initial_outflow +sum([cash_flow_new_equipment ( *1+ growth_rate_new_equipment) ** year / ( + discount_rate) ** year

for year inrange(1,

lifespan_current_machine + 1)])# Compare NPVs

if npv_new_equipment npv_current_machine > : print("Leon should purchase the new equipment.") print("NPV of new equipment:", npv_new_equipment) print("NPV of current machine:", npv_current_machine)else:

print("Leon should continue with the current machine.") print("NPV of current machine:", npv_current_machine) print("NPV of new equipment:", npv_new_equipment)This is the result:

We can see that the NPV for a current machine is approximately $5.520.818,01, smaller than the NPV for new equipment ($5.784.346,73)

=> I think that Leon should purchase the new equipment

There may be errors in NPV estimates and consequent investment decisions if all projectsare treated equally and the Weighted Average Cost of Capital (WACC) is used as the discount rate Typically employed as a project discount rate, the WACC shows the average cost of financing for a business, taking into account both debt and equity It does, however, operate under the assumption that the project's risk is equal to the company's overall risk, which may not always be the case.

The risk of either overestimating or underestimating a project's actual worth arises from depending just on WACC when discounting future cash flows This disparity results from the possibility that various projects within an organization have differing risk profiles, which are impacted by variables like industry dynamics, project-specific hazards, and market dynamics

inaccurate NPV estimates.

In the case of Leon and the decision to purchase new equipment, using the current WACCof 5% as the discount rate for evaluating the new equipment investment might not accurately reflect the project's unique risk characteristics The new equipment project may have different risk factors compared to the company's overall operations, such as technological uncertainties, market demand variations, or regulatory considerations

Therefore, Leon should exercise caution when applying the WACC as a discount rate and should assess whether the risk of the new equipment project aligns with the company's overall risk profile If the new equipment project exhibits similar risk characteristics to the company's existing operations, using the current WACC could be appropriate However, if the project's risk differs significantly, Leon should consider using a discount rate that reflects the specific risk profile of the new equipment investment This approach ensures more accurate NPV calculationsand facilitates informed investment decisions tailored to the project's unique circumstances.

c) I have a python code for recalculating the NPV for new equipment with 6% discount rate:# Re-answer (a) using a 6% discount rate for the new equipment:

discount_rate_6_percent = 0.06 # Discount rate for new equipment# Calculate NPV for new equipment with 6% discount rate

npv_new_equipment_6_percent = -initial_outflow +

sum([cash_flow_new_equipment ( *1 growth_rate_new_equipment) ** year / (1 + discount_rate_6_percent) **year

for year inrange(1lifespan_current_machine + 1)])# Compare NPVs

if npv_new_equipment_6_percent npv_current_machine > : print("Leon should purchase the new equipment with a 6% discount rate.")

print("NPV of new equipment (6% discount rate):",

This is the result:

Question 4:

a) Operational Risks and Controls:

1 Attendance Recording Errors:

Risk: Staff may forget to tap their cards, leading to inaccuracies in attendance records.

Control: Implement automated attendance tracking systems (e.g., biometric scanners) to reduce reliance on manual inputs.

2 Data Extraction Errors:

Risk: Inaccurate extraction of timesheet data to Excel may result in incorrect payroll calculations.

Control: Utilize automated data extraction tools to minimize human error and ensure data integrity.

3 Manual Input Errors:

Risk: Payroll staff may make mistakes when inputting timesheets and salary data into Excel, leading to incorrect salary calculations.

Control: Implement validation checks and dual authorization for data input to reduce the likelihood of errors.

4 Review and Approval Delays:

Risk: Delays in HR review and approval may lead to late payment of salaries.Control: Set clear timelines for review and approval processes, with escalation procedures for overdue tasks.

5 Payment Processing Errors:

Risk: Errors in transmitting salary data to the bank may result in incorrect payments to employees.

Control: Implement reconciliation procedures to ensure accurate transfer of salary

Key Risk: Attendance Recording Errors

Assumption: The attendance system relies solely on manual card tapping, with no

backup systems.

Key Risk Indicator (KRI): Percentage of missing attendance records exceeding 5%.Threshold:

Red: Missing attendance records exceed 10%.

Amber: Missing attendance records between 5% and 10%.Green: Missing attendance records below 5%.

Risk Profile:

Red: If more than 10% of attendance records are missing, there is a high risk of payroll

inaccuracies and potential employee dissatisfaction due to incorrect salary calculations.

Amber: If missing attendance records range between 5% and 10%, there is a moderate

risk of payroll errors, requiring immediate attention to prevent escalation.

Green: If missing attendance records are below 5%, the risk of payroll inaccuracies is

low, and operations are running smoothly.

To analyze and identify strategic risks related to Energizer's plan to expand its visibility in the Vietnamese market and boost the sale of EVEREADY, we can use the SWOT analysis framework SWOT stands for Strengths, Weaknesses, Opportunities, and Threats Here's how wecan apply it:

Rayovac, VARTA).

Strong distribution network and manufacturing capabilities.Experience in the battery and portable lighting products industry.Financial resources for investment and expansion.

4 Threats:

Economic and political instability in Vietnam affecting business operations.Regulatory challenges and compliance requirements in the Vietnamese market.Currency fluctuations impacting profitability.

Counterfeit products and intellectual property infringement.

By conducting a SWOT analysis, Energizer's management can gain insights into the internal strengths and weaknesses of the company as well as external opportunities and threats inthe Vietnamese market This analysis will help them develop strategies to mitigate risks, capitalize on opportunities, and achieve their objectives effectively Additionally, seeking input from local market experts and conducting thorough market research will enhance the accuracy and relevance of the analysis.

B Insurance

In this section, we will outline the critical risks associated with the primary operations of X,

Risk of gas exploration: This includes the potential damage to drilling equipment during exploration activities.

Risk of gas production: This encompasses the risk of construction damage and fire damage during gas production processes.

Risk of oil delivery: This involves the risk of damage to shipping vessels during the transportation of oil.

Recommended Insurance Products to Protect X from Essential Risks:

1 Drilling equipment and rigs insurance: This policy provides coverage for damage to drilling equipment used during exploration activities.

2 Offshore construction & erection insurance: This insurance protects against related damages incurred during gas production activities.

construction-3 Fire insurance for oil refinery: This policy covers damages caused by fires at oil refineries.

4 Fire insurance for buildings: This insurance provides coverage for damages to buildings used in gas and oil production processes.

5 Hull insurance: This policy protects against damages to shipping vessels used for oil delivery.

6 Cargo Insurance: This insurance covers losses or damages to cargo during transit.Unnecessary Insurance Products:

1 Public liability insurance: This coverage is unnecessary as it primarily addresses legal and compensation-related costs of claims against the business, which may not be relevantto X's operations.

2 Health care insurance for all employees: Health care expenses of employees are not directly related to the operational risks outlined for X.

3 Occupational accident insurance for employees working on oil platforms: Since insurers only make payments in case of work-related injuries, this insurance is deemed unnecessary for X's operations.

4 Endowment life insurance for all employees: This product, which provides financial protection in case of employee death, is unnecessary for addressing the operational risks faced by X.

5 Life insurance retirement plan for managers: Similar to endowment life insurance, this coverage is unnecessary as it does not mitigate the specific risks associated with X's