Asked by Nguyên Tr?ng on Jul 16, 2024
Verified
Although they operate in different industries,two firms have the same expected earnings per share and the same standard deviation of expected EPS.Thus,the two firms must have the same business risk.
Business Risk
The risk inherent in the operations of the firm, prior to the financing decision. Thus, business risk is the uncertainty inherent in a total risk sense, future operating income, or earnings before interest and taxes. Business risk is caused by many factors. Two of the most important are sales variability and operating leverage.
Standard Deviation
A statistical measure of the dispersion or variability of a set of data points, often used in finance to gauge investment risk.
Expected Earnings
The forecasted income of a company, often estimated by analysts based on historical data and future projections, indicating potential future profitability.
- Differentiate between business risk and financial risk and their determinants.
Verified Answer
JA
Jairo AldanaJul 17, 2024
Final Answer :
False
Explanation :
Business risk is influenced by factors beyond just the expected earnings per share (EPS) and its standard deviation, including the industry characteristics, competitive position, operational complexity, and exposure to economic cycles. Two firms in different industries can have similar financial metrics but very different underlying business risks.
Learning Objectives
- Differentiate between business risk and financial risk and their determinants.