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Distinguish between financial risk and operating risk.

      

Distinguish between financial risk and operating risk.

  

Answers


Martin
Financial risk
- This refers to the variability in earnings available to ordinary shareholders as a
result of using debt finance which has a fixed interest charge.

- In times of excessive profits, the earnings are enhanced due to lower charges for
interest. However during period of low profits, the shareholders risk not getting
any return since interest on debt is to be paid irrespective of profits earned.?
Operating risk
-Operating risk on the other hand is caused by incurrence of fixed costs in
production process. It is the variability in operating income as a result of
incurring fixed operating costs.

- When fixed costs are high, this variability will be higher for any change or
movement in sales and hence operating risk is higher.

marto answered the question on February 11, 2019 at 09:58


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