The managers of a toy company need to identify the precise ways that these risks might
affect firm value. If consumers tire of the faddish toy, how much will demand decrease?
What is the expected length of time before a sharp decrease in demand occurs? Can the
toy company prolong the fad through advertising or by decreasing the price? Volatile
demand also increases the possibility that the firm will be stuck with obsolete inventory
after the toy fad ends, which will certainly be costly. If the firm has expanded by buying
more toy-making machinery, does this machinery obsolesce as well, or can it be used in
the production for other toys? If it can be used for other toys, how profitable are these
other toys likely to be? In sum, precision in specifying risks translates into greater
ability to measure the effects of those risks.