Managing Corporate Risk 1
Managing Corporate Risk:
Value at Risk
Managing Corporate Risk 2
Managing Corporate Risk:
Value at Risk
Corporate risk, or impaired enterprise value, represents a legitimate concern for many corporations. Unfortunately, it is a measure that is largely ignored by most private corporations. Properly managing risk is a multiple step process that requires:
(a) Examination of enterprise value
(b) Value at risk exploration
(c) Corporate governance
This review of corporate risk focuses on these 3 steps.
Examination of Enterprise Value
It is a commonly held belief that a constant stream of revenues, profits, and cash flows equate to increasing shareholder value (Leitner, 2006). However, this is not always true. Only by measuring enterprise value can one be definite. Enterprise value provides a measure of a corporations value in terms of the total funds used to finance it. More precisely, enterprise value is often reported as a ratio to earnings before interest, tax, depreciation, and amortization. The enterprise value to earnings before interest, tax, depreciation, and amortization ratio is used as an alternative to the price/earnings ratio because it provides a measure of the economic return rather than the accounting return that the firm is generating on the total value of capital. ("Enterprise Worth", 2000).
Managing Corporate Risk 3
Value at Risk
Once a corporation embarks upon a path of making enterprise value a regular part of its planning and operating decisions, it can then start measuring value at risk. Similar ...