kim226

Financial risk is borne by:

A) common shareholders.

B) creditors.

C) managers.

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Common shareholders are the residual owners of the company. As such, they experience the benefits of above-normal gains in good times and the pain of losses when the business is in a slow period. Financial leverage magnifies the variability of earnings per share due to the existence of the required interest payments.

kim226

Hughes Continental is assessing its business risk. Which of the following factors would least likely be considered in the analysis?

A) Debt-equity ratio.

B) Input price variability.

C) Unit sales levels.

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The main factors affecting business risk are demand variability, sales price variability, input price variability, ability to adjust output prices, and operating leverage. Debt levels affect financial risk, not business (operating) risk.

kim226

Which of the following factors is least likely to affect business risk?

A) Demand variability.

B) Interest rate variability.

C) Operating leverage.

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Business risk can be defined as the uncertainty inherent in a firm’s return on assets (ROA). While changes in interest rates may impact the demand or input prices, there is a more direct impact on business risk with the other three choices.

kim226

Variability in a firm’s operating income is most closely related to its:

A) internal risk.

B) business risk.

C) financial risk.

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Business risk is the uncertainty regarding the operating income of a company. Financial risk refers to the uncertainty caused by the fixed cost associated with borrowed money.

kim226

Which of the following statements about business risk and financial risk is least accurate?

A) Business risk is the riskiness of the company's assets if it uses no debt.

B) The greater a company's business risk, the higher its optimal debt ratio.

C) Factors that affect business risk are demand, sales price, and input price variability.

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The greater a company’s business risk, the lower its optimal debt ratio.