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Answer: Both the company's risk capacity and risk appetite will increase.
## Explanation **Risk Capacity** refers to the maximum amount of risk an organization can take on given its financial resources, capital structure, and operational capabilities. When the company receives equity funding: - **Financial resources increase** - more capital available to absorb potential losses - **Capital structure strengthens** - equity provides a cushion against financial distress - **Risk capacity increases** - the company can now withstand larger potential losses **Risk Appetite** refers to the amount and type of risk an organization is willing to take to achieve its strategic objectives. When the company switches to riskier projects: - **Strategic focus changes** - the company is deliberately choosing higher-risk opportunities - **Risk tolerance increases** - management is willing to accept more risk for potentially higher returns - **Risk appetite increases** - the organization's willingness to take risk has grown Therefore, both risk capacity (ability to bear risk) and risk appetite (willingness to take risk) will increase after the equity funding and strategic shift to riskier projects.
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A start-up company is undergoing a series of operational changes. The company expects to receive a round of equity capital to finance its growth strategies. A risk manager at the company is evaluating the risk of the company as well as the company's new capital structure. The manager notes that the company has decided to switch its business focus to riskier projects upon receiving the equity funding. Which of the following is most likely correct for the manager to conclude once the funding completes and the new projects are undertaken?
A
The company's risk capacity will decrease and its risk appetite will increase.
B
The company's risk capacity will increase and its risk appetite will decrease.
C
Both the company's risk capacity and risk appetite will remain the same.
D
Both the company's risk capacity and risk appetite will increase.