Question

Distinguish and explain the differences between business and financial risk and provide an example from a publicly traded company. Use specific examples and citations to support your assertion for business or financial risk.

Answer 1

Basis	Business Risk	Financial Risk
Definition	Business risk is risk related to doing a business i.e. risk of losses in a business.	It is the risk of not being able to pay off the debt.
Eg.	If a company enters into a new business and it is not able to sell its product over the period as expected, thereby incurring losses.	If a company takes debt from the bank and is not able to make payment of the interest or the repayment of the debt.
Nature	It is related to operations of a business.	It is not operational.
Can it be avoided	No since it is inherent to the business. Eg there is no business which does not have a risk of incurring losses or being shut down	It can be avoided by using equity and not debt. Eg. a firm can use 100% equity and completely avoid financial risk.
Reason	It is taken to make new business opportunities.	It is taken to decrease cost as the debt is cheaper in comparison to equity.
Duration	It happens until the business activity is being undertaken	It is present as long as there is debt on the firms balance sheet.

For example pepsico's company debt to equity ratio increased from 0.50 to 3.38 thereby making it a risky business in terms of financial risk even though the company was earning good profits without much of a business risk.

On the other hand, kodak had to incur a lot of losses due to change in taste and preference of the consumers and with the arrival of digital cameras. From being the biggest giant in the cameras section, they were reduced to a very small position in the market since they were not able to adapt to the changing technology.