Systematic risk refers to the
risk that faces all the firms operating in a particular industry. Systematic
risk is not diversifiable as it comprises of risks that are unavoidable by all
the companies in the sector. For instance,these hazards can include such as
power shortages, inflation or change in government regulations in a country
will definitely affect a company. It is therefore clear that there is no firm
in the industry, which can prevent the systematic risks from occurring, neither
can the company diversify from the risks (Marshall, 2015).Systematic risk is
sometimes referred to as volatility and is measured using the risk factor,
known as the Beta. Potential investors can use the weighted beta factor for the
businesses operating within a particular sector, to determine whether an
investment in a specific industry, is worthwhile (Marshall, 2015).
The Press Metal Bhd is a company based in Malaysia and mainly
operates in two sectors. The sectors are the manufacturing of the iron sheets
and the trading of the same. The first primary examples of systematic risks
that the firm is facing is inflation risk. Inflation means increasing the price
level, which directly increase the cost for consumers.The company will loss
their purchasing power during inflation period as the cost of raw materials
become higher.The cost of raw materials and the entire cost of production will
go up by a more significant margin, than it is, in the current situation. For
example, during inflation period,the prices of aluminum has increase
continuously, average price of aluminum have closed to $1900 per metric ton in
this year,around 18% higher than average aluminum prices last year. This are
influenced by the supply and demand of aluminum in china, as china is the world
largest producer and consumer of metal.
Next, currency risk is also one of the systematic risk that the
firms is facing. It also referred as foreign exchange risk. This is usually
when exchange rate become volatility that will affect the business’s
performance. As the company have conducted its business in an international
status that include Asia, South East Asia, Europe and Americans. Thus, they
need to convert Malaysia Ringgit (RM) into a foreign currency to enable to run
their business. But the weakening of RM against other foreign currency will
influence the profitability of business during economic downturn or the value
of RM relative to become smaller when converted back to RM during economic
recessions in that country. Therefore, it is essential for the company to using
hedging method to mitigate the currency risk.
Unsystematic risks refer to the
risks that affect a particular firm, in a specific industry of operation
(Marshall, 2015). It is considered controllable by a company. It is possible
for the company to fully take charge of the unsystematic risks by making wise
investment decisions, which will help the firm to diversify its portfolio. The
unsystematic risks that a firm may face include the business risk, operational
risk, the product risk, financing risk, credit risk and liquidity risk. Consequently,
if the management of such a corporation makes a prudent decision, the company
can be able to diversify such risks mainly by investing in diversified
portfolios. The investment in diversified portfolios enables the business the
company to offset the risks it may be facing in one of the investments it has
made, such that, when one sector fails, the firm will still be in a position to
The Press Metal Bhd
Company also face liquidity risk,
risk is a risk that a company or bank is not able to meet short term financial
needs. This usually occurs when a company is unable to convert an asset into
cash without making loss. At that time , there are few buyers or an inefficient
market and the real value of the asset cannot be sold hence the company ends up
selling 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 estate
market. This may end up selling the home at a lower price so as to meet the
financial needs. In better economic times, the home may even be sold at a
higher 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 which
occurs when a borrower fails to make payments on any debt making the lender
incur losses in the principal of the loan or interest attached to it. In other
terms, it is the probability that the borrower will default. There is always a risk when a lender gives
out loans that the borrower may not be
able to pay the loan within the required period of time agreed. Banks and any
other financial lending institutions always face this problem since you are not
sure about the client. It therefore requires certain factors to be considered
before one is given a loan so that the lender can be assured of paying the
The issuance of preference share enables the
company to raise funds for the company, in return for the payment of the
preference dividend which is a constant or fixed amount. The advantage of
issuing the preference shares is that they do not have voting rights, and
therefore, they cannot have any dilution
effect on the votes of the shareholders. Preference shares can be redeemable,
to mean that they can be repurchased back by the company, after a certain
period, or they can be irredeemable, to indicate that the company can never
repurchase 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, in
the distribution of a company’s assets in case of liquidation, the shareholders
of such shares, enjoy the preferred dividend, which is issued at a constant
rate per annum.
The company may decide to acquire loans from
financial institutions such as the Islamic bank, or it may also choose to offer
the debenture certificates to persons who may be willing to subscribe to them,
and in return, the firm acquires the required to finance its operation. Bank
loans provide short, medium and long time financing to business and companies
which are to be paid on certain interests. The banks require assurance that the
loan will be paid and as such they want securities like mortgage or log book on
personal assets. This will act as a collateral between the company and the loan
so if the client fails to pay the loan, the financing institution may use the
security to get the loan. Overdrafts are more preferred for an upcoming coming
since 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 more
expensive compared to long term loans hence the company needs to do good
evaluation before settling on these methods. A company may also decide to take
debentures which are mostly long term loans. They are repayable on a fixed rate
though not all debentures since others do not have fixed date of return of the
funds. Debentures are more preferred
than loans they have a lower interest rate thus becoming easy to pay than
loans. They are also paid in future not like loans which are paid in a short
period after acquiring the loan. These loans together with debentures provide
finances for the company to run its activities smoothly. Debentures are also
easily sold in stock exchange markets and have fewer risks than things like
equities. This builds confidence to the company and prefers to go for
debentures to manage its operations of day to day activities. The loans
requires good management in its usage so that the company does not make losses
when paying back loan by not achieving what the loan was planned to accomplish.
Conclusion on the
financing and benefits to company
Large amount of money to the
Bank loans provide good amount of
money which the company requires to run
its financial demands. This amount cannot be obtained from friends or savings
hence the company becomes financially stable after getting bank loan.
When the company gets the loan, it is required to make sure that the
regular installments are paid on time so that there is good terms with the
bank. The bank does not follow to see how the loan is going to be used provided
the payments are paid on time thus the company is flexible to invest the loan
in any field of business.
Low interest rates
Bank loans are cost effective in that they charge fewer interest rates
compared to credit cards and the company will make high profits thus end up
earning more from the loan. This will in return reduce the costs of the company
and make more profit due to the few costs.
Debentures provide long-term funds to the company where the loan is paid
over a long period of time and the company is in a position to pay the funds in
that given period. This is also convenient to the company which is able to plan
and know how the loan will be serviced within that period.
A bank will require the borrower which is the bank to pay the principal
and interest of the loan. All the other profits the company makes from the loan
becomes profit and can be used to expand the company. This profit will be
retained in the company for other expenses in the company.
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