Business Risk

• Dependent on economic conditions and management’s decision with respect to capital investment. Concerned with the uncertainty associated with an investment’s earnings and the investment’s ability to pay interest, principle, dividends and any other return owed to investors.

• The level of business risk varies from one industry to another and within firms in a given industry. Closely related to the nature of business.

• Defined as the variability in a firm’s expected earnings before interest and tax (EBIT) or operating profit.

• The degree of exposure of business risk is measured by the expected coefficient of variation (COV) in the firm’s expected EBIT. The higher the COV, the higher business risk, the firm is exposed to.

• Relates to a firm’s inability to hold its competitive position and maintain stability and earnings growth.