Assume you have just been hired as a financial analyst by Tennessee
Sunshine Inc., a midsized Tennessee company that specializes in creating
exotic sauces from imported fruits and vegetables. The firm’s CEO, Bill
Stooksbury, recently returned from an industry corporate executive
conference in San Francisco, and one of the sessions he attended was on
the pressing need for smaller companies to institute corporate risk
management programs. Since no one at Tennessee Sunshine is familiar with
the basics of derivatives and corporate risk management, Stooksbury has
asked you to prepare a brief report that the firm’s executives could
use to gain at least a cursory understanding of the topics.
To
begin, you gathered some outside materials on derivatives and corporate
risk management and used these materials to draft a list of pertinent
questions that need to be answered. In fact, one possible approach to
the paper is to use a question-and-answer format. Now that the questions
have been drafted, you have to develop the answers.
Why might stockholders be indifferent whether or not a firm reduces the volatility of its cash flows?
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