Risk and Return

The major uncertainties a firm will face when it issues securities are market uncertainties, industry uncertainties and firm specific uncertainties. Any new information about these factors will change investors’ risk aversion to the securities. As a result, price and required rate of return of the securities will change, which causes uncertainty to successful finance.

Market uncertainties, which are due to macroeconomic factors such as interest rate, political environment and state of economy, can influence the whole security market.

For example, in the 2009 Global Financial Crisis, all firms experiences difficulties in financing because of the recession raises investors’ concern about default risk.

In WorldCom case, the major market uncertainties it is facing are the state of economy, political environment and market competition. Because of the 1997 Asian financial crisis, the U.S. investors are afraid that it will become a global financial crisis. The domestic U.S. company shows slowing corporate profitability due to this turmoil financial market. In addition, a mounting political crisis has raised concern about the tenure in office of the U.S. president, Bill Clinton. If Bill Clinton is failed to re-elected, there is a great chance that the new president will change government policies. As a result, Doe Jones Industrial Average, S&P 500 average and NASDAQ average all experienced significant drops. Moreover, since there is large volume of debt issuing the same time as WorldCom, investors are concern about the quality of debt. In order to attract investors, WorldCom has to raise interest rate and lower the price.

Besides market uncertainty, the industry uncertainty is another important factor. The industry uncertainty is mainly due to government special policy on special industry. In such case, all securities related to this industry will be affected. For example, if an industry has government policy supported such as reducing corporate tax, which...