Question

*Correct*

a. Two major approaches to loss financing are reducing the risky activity and increasing precautions.
b. The direct losses could be due to higher cost of raising additional capital.
c. The risk of being injured in an automobile could be reduced by driving (1) more often and (2) during times that have a higher likelihood of accidents (night time especially during the rush hour period).
d. All the answers are incorrect.
e. Enterprise (integrated) Risk Management (ERM) considers all types of risks (both pure, credit, and price) and analyze altogether to minimize the cost of the risks a firm face.

Answer 1

Firms have various sources of financial capital but must weigh the risks and returns associated with each. They employ risk and loss financing strategies and incorporate Enterprise Risk Management (ERM) to minimize risks across the board.

Step-by-step explanation:

Understanding Capital Sources and Risk Management in Business

When firms seek to finance their ventures, they have multiple options. They can secure financial capital through early-stage investors, reinvest profits, leverage loans through banks or bonds, or sell stock. These choices involve a careful balance of risk and potential return, and companies must consider the cost of capital and the level of control that might be relinquished. Equally, businesses must manage risks associated with their operations, which may include loss financing strategies such as reducing risk through behavioral changes or increasing protections. Moreover, Enterprise Risk Management (ERM) is an integrative approach that considers all forms of risk—pure, credit, and price—to minimize the overall impact on the firm.

Businesses must constantly navigate decisions that could lead to profit or loss. In the event of losses, firms might adjust their production or exit the market to prevent further financial damage. This strategic decision-making is influenced by the concept of imperfect information, where a disparity in understanding and data availability exists between internal operators of a firm and external financial capital providers.