Question

2. Distinguish between a firm’s business risk and its financial risk?

Answer 1

These 2 risk should consider by the investor

The financial risk is the ability to manage the financial debt and cost

The business risk is ability to make profit and make up with operational costs

The financial risk can be avoided by not choosing debt but business risk cannot be avoided

The busness risk will there for foreacble future till the busness last, financial risk will end when the debt is over, or equity finance increases.

Business risk is measured by variability in EBIT, in financing risk it is measured by debt asset ratio and financial leverage.