Financial risks are inherent to both individuals and businesses

Full Answer Section

           

• Economic Risk:
  • Description: The risk that changes in overall economic conditions (e.g., recessions, inflation, unemployment rates, consumer confidence) will negatively impact a company's financial performance.
  • Potential Impact on Disney:
    • Reduced Discretionary Spending: Disney's businesses (theme parks, cruises, movies, merchandise) are highly dependent on consumer discretionary income. During an economic downturn, consumers cut back on travel, entertainment, and non-essential purchases, directly impacting attendance, ticket sales, resort bookings, and consumer product sales.
    • Advertising Revenue Decline: Its media segments (linear TV channels, ad-supported streaming) are susceptible to declines in advertising spending during economic slowdowns, as businesses reduce their marketing budgets.
    • Increased Operating Costs (Inflation): High inflation can increase the cost of labor, materials (e.g., for theme park construction, merchandise production), energy, and transportation, squeezing profit margins if Disney cannot pass these costs on to consumers through price increases.
    • Foreign Exchange Risk: As a global company, fluctuations in currency exchange rates can impact the reported value of international revenues and expenses when converted to USD.
• Credit Risk:
  • Description: The risk that a counterparty (e.g., a customer, a bank, a supplier, or a borrower) will fail to meet its financial obligations, causing financial loss to the company.
  • Potential Impact on Disney:
    • Receivables from Advertisers/Distributors: Disney extends credit to advertisers for media spots and to distributors for content licensing. If these entities face financial distress, Disney could experience delays or non-payment of significant receivables.
    • Credit Card Chargebacks/Defaults: While not directly extending credit for theme park visits, Disney processes vast numbers of credit card transactions. Increased chargebacks or payment defaults from customers could affect revenue collection.
    • Banking Partners/Investments: Disney holds substantial cash and investments. Although generally in highly-rated institutions, there's a theoretical risk of default by a financial institution or a decline in the value of debt securities held.
    • Impact on Business Partners: The financial distress of key suppliers, content creators, or distribution partners could disrupt Disney's operations or content pipeline.
• Operational Risk:
  • Description: The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events (excluding strategic or financial risks).
  • Potential Impact on Disney:
    • Theme Park Incidents/Closures: Accidents, security breaches, or natural disasters at theme parks can lead to temporary closures, significant repair costs, reputational damage, and loss of revenue (e.g., a major hurricane hitting Florida or California parks).
    • Cybersecurity Breaches: As a digital content provider and a company handling vast customer data (e.g., Disney+ subscribers, park visitors), data breaches could lead to massive financial penalties, legal liabilities, identity theft, and severe damage to customer trust and brand reputation.
    • Content Piracy: The illegal distribution of its movies, TV shows, and streaming content leads to direct revenue loss and intellectual property infringement.
    • Labor Disputes/Staffing Issues: Strikes by actors, writers, or park employees can disrupt production schedules, cause park closures, and lead to significant financial losses. Difficulty in attracting or retaining skilled talent in creative or technical fields can also impede growth.
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Sample Answer

         

Systematic and Unsystematic Risk

  Systematic Risk (Non-Diversifiable Risk / Market Risk):Systematic risk refers to the risk inherent to the entire market or market segment. It is an undiversifiable risk because it affects all companies, regardless of their specific industry or business model. These risks are typically macroeconomic in nature and cannot be mitigated through diversification within a portfolio. Investors are compensated for bearing systematic risk.

• Examples: Inflation, changes in interest rates, recessions, political instability, natural disasters, pandemics (like COVID-19), changes in government policy, and major geopolitical events.

Unsystematic Risk (Diversifiable Risk / Specific Risk):Unsystematic risk refers to the risk specific to a particular company or industry. It is diversifiable because it can be reduced or eliminated by holding a well-diversified portfolio of assets from different industries or companies.