Types of risks associated with the investments
Back in the year 2010, New Heritage Doll Company was faced with an urgent need to expand their projects. The then vice president of the company, Emily Harris had a hard time in September the same year in weighing the proposals for the projects that New Heritage Doll Company needed to undertake. The undertaking of the new projects in New Heritage Doll Company was evidence of the undertaking of risks in the investments. One of the projects was Match My Doll Clothing Line expansion, and the other was Design Your Own Doll. A business analysis of New Heritage Doll Company came up with the risk assessment for the kinds of risks that would affect the business.
The first risk for the business is the equity risk. Equity risk is associated with a threat in the investment of the shares of a company (Capital.com, 2018). In our case, New Heritage Doll Company was faced with risk after considering its mutually exclusive and parallel investments. The risk would come up from the drop in the prices of the market shares. The reduction would be linked to the poor financial performance of the company and the subsequent incurrence of losses. Having invested a lot of wealth into the projects, New Heritage Doll Company would be faced with economic setbacks that would lead to the stalling of the company's plans and probably its decline or failure. Equity risk in New Heritage Doll Company would affect all the stakeholders of the company in case there were losses actualized from the lump sum of the money set aside for the investments.
Delegate your assignment to our experts and they will do the rest.
The second risk involved in the investment of New Heritage Doll Company in both Design Your Own Doll and Match My Doll Clothing Line projects would be the liquidity risk. In business perspectives, liquidity is the ability to sell an asset without affecting its value. Liquidity may also refer to the strength of the asset being converted into cash (Barretta & Baird, 2016). Emily Harris, the vice president of New Heritage Doll Company, was faced with a dilemma between authorizing the commencement of the projects and not doing so to mitigate the liquidity risks associated with embarking on the investments that the company wished to undertake. The stakes would make it hard for the company to realize the cash invested in them. For instance, if the two projects would fail, they would not be able to realize the amount of money spent on them.
The quantity of the risks regarding their financial impact
New Heritage Doll Company, as mentioned earlier, took a giant leap of faith in handling two investments, Match My Doll Clothing Line and Design Your Own Doll, Back in October 2010 even after realizing what kinds of risks the company was involving itself in and their financial impact. The company had $245 million as profit for the fiscal year 2009. Also, the company had $27 million in operating profits in the same year. Taking the case of the expansion of the Match My Doll Clothing Line to include all kinds of clothes or different climatic conditions, 3% growth per year would make the terminal value of the project over $16,000 by the year 2020. The payback period for the project would be slightly more than 7 years. For the project, a dollar of the investment would pay back more than three dollars as profits (Luehrman & Abelli, 2010).
In the Design, Your Own Doll project, 3% growth per year would make the terminal value of the investment above $24,000 by 2020. The payback period for the Design Your Own Doll project would be 9 years. At the same growth rate, a dollar of the investment into the project would actualize two dollars as profits. Owing to the risk/return tradeoff explanations in economics, a plan with higher risk can bring in a high return. In the case of New Heritage Doll Company, the Match My Doll Clothing Line posed a higher risk of investment to the company than the design you own doll project (Luehrman & Abelli, 2010).
Methods of mitigating risks
The first method of mitigating risk is to have an income certainty in the company. Often, investment analysts to a company are overly inclined to find out the returns of an individual investment. While the surety of the anticipated profits is vital to the risk assessment in investments, it is also imperative to consider the stability of the market stocks over an extended period. The knowledge on the expandability of the market stocks enables a business to reduce the risk of investing in a particular business idea. For instance, the understanding of the flexibility of the stocks, it is essential to understand the behavior of the stocks over an extended period to know the right time to invest in the project (Knechel & Salterio, 2016).
The second method of reducing the risks associated with the investment is to understand the industry trends and their dynamics due to the forces in the market such as demand and supply, and technology. The doll industry is increasingly dynamic with the improvement in technology all over the world due to the revolution of the production as well as the marketing. In dealing with the projects, New Heritage Doll Company needs to consider the market forces to reduce the risks of investing in its projects (Frésard & Valta, 2015).
The third method of mitigating the risks is to invest in education on investment. Continuous research, especially with the advancement of technology, has characterized modern businesses. New Heritage Doll Company needs to have a team of analysts who will bury themselves in research to come up with the best investment plans for the organization. The constant learning will place the organization at a point where it can reduce the possible risks associated with investments (Sodhi & Tang, 2009).
References
Barretta, B., & Baird, S. (2016). Intraday Liquidity Risk Management. Liquidity Risk Management , 55-80.
Capital.com. (2018). Equity Risk: Definition and Meaning . Retrieved from https://capital.com/equity-risk-definition
Frésard, L., & Valta, P. (2015). How Does Corporate Investment Respond to Increased Entry Threat? Review of Corporate Finance Studies , cfv015.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk . Taylor & Francis.
Luehrman, T. A., & Abelli, H. (2010, September 15). New Heritage Doll Company (Brief Case). Harvard Business Review . Retrieved from https://hbr.org/product/new-heritage-doll-company-brief-case/4212-PDF-ENG
Sodhi, M. S., & Tang, C. S. (2009). Managing Supply Chain Disruptions via Time-Based Risk Management. Managing Supply Chain Risk and Vulnerability , 29-40.
