Question

Please define and explain leverage, business risk, sales risk, operating risk, and financial risk, and classify risk.

Answer 1

Leverage will mean that when we will be using the debt capital in overall business in order to maximize the rate of return.

Business risk is related to to risk associated with overall business including micro as well as macro factors and it will include sustainability of business.

Sales risk is risk related to uncertainty is in the business which will cause loss of sales of Business and it will mean that there will be a loss of revenue

Operating risk is related to loss of operating profit and efficiency on the operating front because it would b to arising out of uncertainty, due to which operating profits are lower

Financial risk is risk of managing finances of the business and it is mostly related with the uncertainty which are existent in the Macro environment because micro environment will include changes in interest rates and inflation which will impact the overall financial position of the company to large extent leading to financial risk.

Risk can be classified between systematic risk and unsystematic risk because systematic risk will be also market risk which can never be diversified whereas unsystematic risk will be firm specific risk which can be eliminated through proper diversification.