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2009 Vol.4
Enterprise risk management and the value of a company

2009/10/01

Enterprise risk management, which extends beyond the concept of internal control, is advocated by many and has become an important issue in business management in the United States.
Companies need to provide organizational responses which recognize, assess, control, and monitor the risks they face. This paper examines what types of risks are recognized as enterprise risks and how their influences (or values) are measured quantitatively, and then attempts to calculate the values based on a model of a company. The calculation shows that external risks such as market risk involving a companyfs products and macroeconomic risk account for the majority of enterprise risk, and that internal risks such as strategic risk and operational risks have relatively low influence.
However, from the standpoint of risk control, a limit exists for controlling external risks while internal risks can, to a large extent, be controlled. This implies the importance of risk control. Enterprise risk that is quantitatively captured reflects uncertainties about events that can potentially affect a companyfs future profits. Therefore, it also has an impact on the calculation of the value of a company (or business) which is the present value of the sum of the companyfs future profits.
Understanding rationally the fundamental value of a company requires both knowing enterprise risk,which this paper attempts to measure, and calculating the value of the company with the value of the risk deducted.

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