MGT201 GDB Solution Idea Due Date 17-06-2013

Total Marks	4
Starting Date	Thursday, June 13, 2013
Closing Date	Monday, June 17, 2013
Status	Open
Question/Description	Discussion Question: Stand-alone risk on an individual project may be very high but its actual risk may or may not be higher in the context of the project’s effect on the company’s common stockholders. Discuss both dimensions with conceptual rationale. Special Instruction: You are supposed to discuss both dimensions with conceptual rationale; the actual risk will be higher for which class of common stockholders and it will be lower for which class of common stockholders? Important Instructions: 1. Your discussion comments must be based on logical facts. 2. Your comments should be brief and to-the-point. Avoid unnecessary details. 3. The GDB will remain open for 3 days or 72 hours (excluding weekend) --OR-- 5 days or 120 hours (including weekend) 4. Do not copy or exchange your comments with other students. Two identical / copied comments will be marked Zero (0). 5. Obnoxious or ignoble comments should be strictly avoided. 6. Questions/queries related to the content of the Discussion Board, which may be posted by the students on MDB or via e-mail, will not be replied till the due date is over. Ø For Detailed Instructions please see the Announcement

         

SOLUTION IDEA:

there are two cases to discuss,

The actual risk is higher for which class of common stockholders.

The actual risk is lower for which class of common stockholders.

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Risk

1. uncertainty about a project's future profitability.

2. it can be measured by sigma Npv, sigma IRR, and beta.

3. risk of the projected increase in the firm's and stockholder's risk.

There are three types of risk.

Stand-alone risk-Eaziest measurement, intuitive approach.

Corporate risk-mainly relates to creditors, customers, suppliers & Employees.

Market or beta risk-Theoretically best

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Read this statement out

Standalone risk measures the dangers associated with a single facet of a company's operations or by holding a specific asset. In portfolio management, standalone risk measures the undiversified risk (Systematic Risk) of an individual asset. For a company, standalone risk allows them to determine a project's risk as if it were operating as an independent entity.

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MGT201 GDB Solution & Discussion Last Date:17--06--2013

Risk
1. uncertainty about a project's future profitability.
2. it can be measured by sigma Npv, sigma IRR, and beta.
3. risk of the projected increase the firms and stockholders risk.
There are three types of risk.
Stand-alone risk-Eaziest measurement, intuitive approach.
Corporate risk-mainly relates to creditors, customers, suppliers & Employees.
Market or beta risk-Theoretically best

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Read this statement out
Standalone risk measures the dangers associated with a single facet of a company's operations or by holding a specific asset. In portfolio management, standalone risk measures the undiversified risk (Systematic Risk) of an individual asset. For a company, standalone risk allows them to determine a project's risk as if it were operating as an independent entity.

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What I can perceive so far from the Case is, The risk would be higher for those common stockholders, who just invest in a single stock or in a particular section of the company. As they put all their investments in a single section and entire return on investment is now dependent on the performance of that specific project. If that project couldn't perform well, because of any reason, their investment would return nothing.
Elaborate in your own words a little more.

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Definition of 'Standalone Risk'

The risk associated with a single operating unit of a company or asset. Standalone involves the risks created by a specific division or project, which would not exist if operations in that area were to cease.

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RISK

The chance that an investments' actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment.

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The risk is high if the project is a big one project and there are few stockholders. Each one of the stockholders will invest a huge amount hence the risk will be high.
The risk is not high if the project is a small one project and there are more stockholders. Each one of the stockholders will invest a little amount hence the risk will not be high.


I think, two classes of shareholders are preference shareholders and ordinary shareholders, n less risk for preference shareholders bcoz they received fixed dividend regardless of profit or loss and higher for ordinary they received according to P/L.

I think the risk will be higher for those stockholders who have not diversified their investment. and the risk will be lower for those stockholders who have diversified their investment.