The business risk of a particular company is most accurately measured by the companys:

QUESTION

The business risk of a particular company is most accurately measured by the companys:
A. debt-to-equity ratio.
B. efficiency in using assets to generate sales.
C. operating leverage and level of uncertainty about demand, output prices, and competition.
Answer: Business Risk refers to the possibility that company will have lower profit than anticipated. It is influenced by a number of factors including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations. To calculate business risk analyst use operating leverage. Operating leverage results from the existence of fixed operating expenses in the firms income stream . It may be defined as the firms ability to use fixed operating cost to magnify the effects of changes in sales on its earning before interest and taxes. It is the

risk of the firm not being able to cover its fixed operating costs. The larger is the magnitude of such costs ,the larger is the volume of sales required to cover them. Thus, the business risk of a particular company is most accurately measured by the companys operating leverage and level of uncertainty about demand, output prices, and competition. That is option c is correct

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