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Asma Risk

Financial risk refers to a firm's inability to pay off its debts. Pepsi's debt-to-equity ratio has increased over the years from 0.50x in 2009-2010 to currently 3.38x, which is undesirable. However, if a firm prudently takes on debt and aims for a capital structure of 70% equity and 30% debt, it can minimize financial risk while taking advantage of leverage. Credit risk for Apple focuses on invalidated credit purchases on its online store, an important source of income. However, credit payments often fail due to bank issues or fraud, negatively impacting Apple's finances. Market risk includes interest rate risk and foreign currency exchange rate risk. Interest rate

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64 views2 pages

Asma Risk

Financial risk refers to a firm's inability to pay off its debts. Pepsi's debt-to-equity ratio has increased over the years from 0.50x in 2009-2010 to currently 3.38x, which is undesirable. However, if a firm prudently takes on debt and aims for a capital structure of 70% equity and 30% debt, it can minimize financial risk while taking advantage of leverage. Credit risk for Apple focuses on invalidated credit purchases on its online store, an important source of income. However, credit payments often fail due to bank issues or fraud, negatively impacting Apple's finances. Market risk includes interest rate risk and foreign currency exchange rate risk. Interest rate

Uploaded by

Asma Shoaib
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

Financial Risk

Financial risk is the inability of the firm to not being able to pay off the debt it has taken from the bank or
the financial institution.

Pepsi’s Debt to Equity ratio was around 0.50x in 2009-2010, however, Pepsi’s leverage has increased
over the years and is currently at 3.38x. This situation is obviously undesirable. But if a firm uses
prudence to take debt, then they can keep their risk at a minimum. Let’s say that a firm wants to reduce
financial risk and at the same time, they want to take advantage of the financial leverage debt will
provide. In this case, they should go for 70% of equity and only 30% of debt in their capital structure. Of
course, this is hypothetical and after looking at all factors the decisions related to the capital structure
should be made.

2. Credit Risk

Credit risk for Apple, focuses on the detention and even invalidation on credit purchase for Apple
services. Online store is one of the most important income approaches of Apple. Apple spent a lot of
effort to sustain the online store`s advantages, and gain a great income from that. However, the main
payment approach, credit pay, usually fails because of random or artificial reasons. Such as Bank
problems and individual, co-operate fraud. These credit risks create significantly negative effect on
Apple`s finance performance.

3. Market risk

Although, the market share of Apple is gratifying, especially in mobile communication devices, and
portable digital music and video players markets, Apple still needs to confront two major risks in market.
Following the development global expansion of Apple, the activities related to interest rate and foreign
currency increase at an amazing rate. Therefore, the uncertainty of interest rate and foreign poses a
material negative effect on company`s performance.

Firstly, interest rate risk. Because Apple is exposed to interest rate fluctuations in many advanced
developed countries, Apple`s interest income and expense is most sensitive to fluctuation in interest rates
of these countries. Therefore, these changes directly affect the interest earned on Apple`s cash, securities
and costs related to foreign current hedges.

Secondly, foreign currency exchanges rate risk. Generally, Apple is a net receiver of currencies, since
then, because of the changes in exchange rates, the net sales and gross margins of Apple as expressed in
U.S. dollars would be negatively affected by these changes. Moreover, Apple should adjust its products
prices to local market when the exchange rate has changed, usually U.S. dollar is strengthen, which
causes the negative effect on sales from local competition with lower prices. Meanwhile, Apple`s
contracts with financial institutes to protect Apple against exchange rate risk lead to increase the
prohibitive economic cost of hedging particular exposures.
4. International operational risk

Apple derives a large and increasing portion of its revenue and earnings from its international operations
(Form 10k, 2009). The different regulation and culture might raises the operate cost. Meanwhile, anyone
of these operations has possibility to violate local regulations and laws, which increase the risk of
international operations management. Moreover, Apple`s financial condition and operating results also
could be affected by risks related to international activities. Such as changes in local economic, labor,
political and exchanges rate situation. All these macro changes could affect Apple through its
international operations.

https://www.ukessays.com/essays/business/the-major-risks-apple-is-exposed-to-business-
essay.php

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