Meaning of business risk, capital structure and financial risk.

Question

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Answer 1

Question

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Scenario three: If a portfolio has a positive investment in every asset, can the expected return on a portfolio be greater than that of every asset in the portfolio? Can it be less than that of every asset in the portfolio? If you answer yes to one of both of these questions, explain and give an example for your answer(s). Please Provide a Reference

Answer 2

Question

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.

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Answer 3

Question

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.

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Answer 4

Question

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.

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Answer 5

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.

Answer 6

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

Answer 7

Chapter 15, Problem 1Q

a)

Summary Introduction

To discuss: Meaning of business risk, capital structure and financial risk.

Answer 8

a)

Expert Solution

Explanation of Solution

Capital structure is the combination of debt and equity. Through capital structure it is decided that how much leverage ratio has to be maintained and company decides which sources it will get money and how much volume.

Business risk refers possibility of occurrence of loss due to changes in government policy, taste and preferences of customers that will leads to affect the factors like sales volume, sale price and sales per unit.

Financial risk is the risk where various types of risks associated with this like default risk, in which company sold out item in credit to customer, if customer default in payment or increased the time limit of payment of his cash which ultimately increase the financial risk.

Financial risk might arise due to foreign investment wherever the possibility of risk is higher.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

Answer 13

b)

Summary Introduction

To discuss: Meaning of operating, financial leverages and break-even point.

Answer 14

b)

Expert Solution

Explanation of Solution

Operating leverage: It is nothing the degree of change in operating income for percentage change in sales. It is nothing but the ratio of contribution to operating income.

Degree of operating leverage=Contribution marginOperating income

Financial leverage: It is nothing the degree of change in total debt to shareholder’s equity.

Degree of financial leverage=Total debtShareholder's equity

Break-even point: It is point where, company has no profit no loss. At break-even point all fixed costs are recovered. It is calculated by using the formula,

Break-even point=Fixed costContribution margin per unit

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.

Answer 19

c)

Summary Introduction

To discuss: Reserve borrowing capacity.

Answer 20

c)

Expert Solution

Explanation of Solution

It is the capability that company maintain or reserve for future borrowings at the time of good investment arises. Banks are needed to keep cash for uncertain liability and likely the company maintains a reserve borrowing capability to satisfy sensible investment or uncertain liability arises.