Business and Financial Risk

Business and Financial Risk

WK-08 Discussion Question – Business Risk versus Financial Risk

In your own words, explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Why or Why not? Explain. (Ross, Westerfield, & Jaffe, 2016).

Reference

Ross, Stephen A., Randolph Westerfield, and Jeffrey F. Jaffe. Corporate Finance. 12th ed.: Capital Structure, Chapter 16. New York: McGraw-Hill, 2016.

Answer preview

Business risk refers to the vulnerability of business to factors that undermine the achievement of set goals and objectives. Majority of business objectives include profit increment and market expansion. The business risks threaten set business plans and may result in the collapse of the business. Business risks naturally exist in a business environment, which makes them difficult to avoid. For example, unavoidable factors such as natural disasters and changing customer preferences influence business risk (Ross, Westerfield, & Jaffe, 2016).

Businesses should, therefore, implement effective risk management strategies to reduce the impacts of these risks. Prior preparedness…

(300 words)

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