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The Professional's Guide to Fair Value: The Future of Financial Reporting by James P. Catty

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10

Sources of Value—Risks

Let everyone have confidence in the future.

—Wen Jiabao (1942–), Chinese premier and statesman

CHAPTER 9 STATED THAT there are only two means to increase the value of an enterprise—increase profits or reduce risks. It went on to discuss some ways of improving profits: innovation, value maps, DuPont analyses, and elimination of loss-making areas. In the simplest of terms, the value of an entity is its net income divided by an appropriate capitalization rate; the first way of increasing value has two beneficial effects. It raises the numerator (net income) and, by adding growth, reduces the denominator (capitalization rate). This chapter deals with the other side of the equation, the reduction of risks, defined by the Oxford English Dictionary as:

Exposure to the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such possibility.

With respect to businesses, the most common risks are listed as factors in developing capitalization rates by a buildup method (see Chapter 8).

REDUCING RISKS

The first and easiest way to reduce risks in a firm is to improve the quality of its employees and their interactions. A contentious but effective method is to use intelligence quotient (IQ) tests, which have been shown to measure more than quick-wittedness, as part of the hiring procedures. They were first put forward over 100 years ago, by the British psychologist Charles Spearman, who claimed that test results were ...

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