Question

12.1 (Business and Financial risk) Which of the following sources of new earnings volatility represents the effect of business versus financial risk (discuss the rationale for your decisions):
a. Pajala AB in Sweden is considering implementation of an ambitious lifelong education program that would be offered to all employees, and is willing to borrow 50 percent of the money needed to fund the project.

b. Schenker Trans has historically acquired its own trucks, and has recently signed an agreement with a local transportation company to outsource part of its short distance deliveries,

c. Lidl has been a low-cost grocery shop that sells basic products. The firm recently decided to purchase a local bakery nearby, in order to sell freshly made bread.

Answer 1

Ans) Business risk refers to the risk of fluctuations  in returns that is profit or loss due to the occurrence of uncertainities.In short business risk refers to the risk associted with the failure of operation of business.Financial risk is the risk arises for the company as it will not be able to pay its debt.

a) In the first case the company wants to implement a trainning programme through debt financing hence the risk involved is the financial risk which is related to non payment of debt due to uncertain events.

2.) In this case a companay Schenker acquires its own trucks and had an agreement with local service provider to outsource the local delivery hence this has the risk of operational failure that will impact the continuty of operation hence it is a business risk because if the third party does not perform the delivery well than the productivity will hamper and lead to decline in profits

C) In this case there is a financial risk because, the grocery company is purchasing the bakery firm to sell fresh bread hence there is payment involved so as the cost hence there is financial risk as the grocery firm is small , it might have taken funds from outside for the purchase .