Asked by Elaiha Ramos on Jun 30, 2024
Verified
Describe some of the sources of business risk and financial risk. Do financial decision makers have the ability to "trade off" one type of risk for the other?
Business Risk
The exposure a company or investor faces due to uncertainties in the market or industry, impacting the company's ability to generate profits.
Financial Risk
The possibility of losing money on an investment or business venture, including risks related to currency, interest rates, and solvency.
- Identify and understand the sources of business and financial risk, and the potential for risk trade-offs.
Verified Answer
ZK
Zybrea KnightJul 06, 2024
Final Answer :
Students should intuitively recognize that some of the observed variation in capital structures across industries, for example, reflect differences in the nature of the industries themselves; i.e., business risk. Similarly, intuition would suggest that firms with large capital requirements and stable cash flows (e.g., electric utilities) are more likely to be willing to raise funds via large amounts of borrowing. Alternatively, firms with lower tangible asset needs and highly uncertain cash flows (e.g., small software companies) are more likely to employ equity.
Learning Objectives
- Identify and understand the sources of business and financial risk, and the potential for risk trade-offs.
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