Credit riskDefault financeFinancial riskInterest rate riskLiquidity riskOperational riskSettlement riskValue at RiskVolatility riskand Insurance Risk management   is the process of measuring risk and then developing and implementing strategies to manage " hedge " that risk.
This histogram provides information not visible from the static DCF: The sensitivity of NPV to a change in that factor is then observed, and is calculated as a "slope": Considerations as to Risk appetite and return targets remain identical, although some constraints — such as those imposed by loan covenants — may be more relevant here.
Per the Modigliani and Miller frameworkhedging is irrelevant since diversified shareholders are assumed to not care about firm-specific risks, whereas, on the other hand hedging is seen to create value in that it reduces the probability of financial distress.
This is the general case, however there are exceptions. See also rNPVwhere cash flows, as opposed to scenarios, are probability-weighted.
Various factors may be taken into consideration: A further advancement which "overcomes the limitations of sensitivity and scenario analyses by examining the effects of all possible combinations of variables and their realizations"  is to construct stochastic  or probabilistic financial models — as opposed to the traditional static and deterministic models as above.
These standard derivative instruments include optionsfutures contractsforward contractsand swaps ; the "second generation" exotic derivatives usually trade OTC. Again, a DCF valuation would capture only one of these outcomes. Managing short term finance and long term finance is one task of a modern CFO.
For example, the analyst will determine NPV at various growth rates in annual revenue as specified usually at set increments, e. In a DCF model, by contrast, there is no "branching" — each scenario must be modelled separately.
Financial risk managementtypically, is focused on the impact on corporate value due to adverse changes in commodity pricesinterest ratesforeign exchange rates and stock prices market risk.
Here, the cash flow components that are heavily impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". This method was introduced to finance by David B. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise.
See also Stress testing.
Note that "inventory" is usually the realm of operations management: The short term goals of working capital are therefore not approached on the same basis as long term profitability, and working capital management applies different criteria in allocating resources: Hertz inalthough it has only recently become common: Sensitivity analysisScenario planningand Monte Carlo methods in finance Given the uncertainty inherent in project forecasting and valuation,   analysts will wish to assess the sensitivity of project NPV to the various inputs i.
In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added EVA. Using a related technique, analysts also run scenario based forecasts of NPV.
There are two inter-related roles here: Dividend policy Dividend policy is concerned with financial policies regarding the payment of a cash dividend in the present or paying an increased dividend at a later stage.
In this context, the most useful measure of profitability is Return on capital ROC. See Decision theory Choice under uncertainty. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials — and minimizes reordering costs — and hence increases cash flow.
A more robust Monte Carlo model would include the possible occurrence of risk events e. In the context of long term, capital budgeting, firm value is enhanced through appropriately selecting and funding NPV positive investments. The goal of Working Capital i. DTA values flexibility by incorporating possible events or states and consequent management decisions.
A share buyback program may be accepted when the value of the stock is greater than the returns to be realized from the reinvestment of undistributed profits.Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources.
The primary goal of corporate finance is to maximize or increase. "Corporate Finance", by Ross, Westerfield, and Jaffe is a popular textbook that emphasizes the modern fundamentals of the theory of finance, while providing contemporary examples to make the theory come to life.Download