fm23 2 - 23-2 If the elimination of volatile cash flows...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers and Solutions : 23 - 3 23-2 If the elimination of volatile cash flows through risk management techniques does not significantly change a firm’s expected future cash flows and WACC, investors will be indifferent to holding a company with volatile cash flows versus a company with stable cash flows. Note that investors can reduce volatility themselves: (1) through portfolio diversification, or (2) through their own use of derivatives. 23-3 The six reasons why risk management might increase the value of a firm is that it allows corporations to (1) increase their use of debt; (2) maintain their capital budget over time; (3) avoid costs associated with financial distress; (4) utilize their comparative advantages in hedging relative to the hedging ability of individual investors; (5) reduce both the risks and costs of borrowing by using swaps; and (6) reduce the higher taxes that result from fluctuating earnings. 23-4
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Ask a homework question - tutors are online