ANSWER TO QUESTION 1:
Explain the difference between business risk and financial risk.
Business risk is the potential for loss of value through competition, mismanagement, and financial insolvency. There are a number of industries that are predisposed to higher levels of business risk as their market environment is more affected by changes in the economy, supplies, price sensitivity, etc. These industry factors may have adverse impact on a company operating income and consequently affects sales and operations and this business risk will change the botXXXXX XXXXXne. Usually is measured by the standard deviation of the historical operating income. Financial risk, is a part of business risk, however it is the additional risk resulting from debt, or the increase of economic leverages that may affect equity or the inability to meet debt commitments. In general, companies that issue more debt instruments will carry higher financial risk.
What other factors besides operating leverage can affect a firm's business risk?
Other factors than can influence the firm's business risk might be linked to the type of industry. Price sensitivity or how variations in the price due to new competitors, consumer fatigue, and market share changes, etc. can increase the business risk of the operation. In addition, mismanagement, segment performance, deterioration of the economy, borrowing or lending failures, increases in costs related to financial operations, decline in value of collateral, cyclical changes of the market and many other factors that can influence the operating leverage by influencing the cycle of sales, distribution, costs and the normal operation of the company.
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