ABC Company has defined its risk appetite statements as follows: ABC Company has no appetite for safety risk exposure that could result in injury or loss of life to the public, passengers and workforce. Safety drives all major decisions in the organisation. All safety targets are met and improved year-on-year. In the pursuit of its objectives, ABC Company is willing to accept, in some circumstances, risks that may result in some financial loss or exposure including a small chance of breach of the loan limit. It will not pursue additional income-generating or cost-saving initiatives unless returns are probable. The company will only tolerate low-to-moderate gross exposure to delivery of operational performance targets including network reliability and capacity and asset condition, disaster recovery and succession planning, breakdown in information systems or information integrity. The company wants to be seen as the best in class and respected across the industry. It will not accept any negative impact on reputation with any of its key stakeholders, and will only tolerate minimum exposure i.e., minor negative media coverage, no impact on employees, and no political impacts.

When we have a high-risk appetite, we accept more uncertainty for potential higher reward. When we have a lower risk appetite, we accept a lower return in exchange for more certainty. Explain the impact of risk appetite on the value of ABC Company. (10 marks)