Business and Financial risk Of a project…Confused with..

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This topic contains 3 replies, has 3 voices, and was last updated by Avatar of johnmoffat John Moffat 2 years, 10 months ago. This post has been viewed 39 times

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  • Avatar of guynextdoor
    guynextdoor
    Participant
    • Topics: 10
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    Q1: what is exactly a busniess risk?? is it realted to fixed costs of a busniess if they r high then business risk is high? em i rite?
    Q2: What can be a business risk of project which has to be undertaken and how does it it differ from the Firm’s business risk??
    Q3: What is project’s financial risk and hw does it differ from the firm’s financial risk?
    Q4: How does Asset beta reflects Only Business risk? wots the logic behind it?

    i kNow these are two many but i was few probs thats y cudnt start preparing on time..
    Waiting for ur reply Loads ov Thanx in advanve..:)


    Avatar of johnmoffat
    John Moffat
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    The business risk depends on the nature of the business.
    All shares are risky – the returns depends on economic factors – but some types of business are more risky and some less risky.

    For example, if you are in a country where the exchange rate against the dollar is floating, then there is risk of exchange rate movements in the future. Businesses that do a lot of trade with the US will be affected much more that businesses which do not trade abroad. It is this riskiness (due to the way economic factors effect the business) that is business risk.

    A project can be more risky or less risky that the existing business risk of a company.
    For example, if a business is currently a mobile phone operator, but decide to make a large investment in a factory to produce desks, then the riskiness of phone businesses is likely to be different to the risk of desk makers.

    Financial risk is the fact that if there is debt in a company (gearing) then it makes the share in the company even more risky (due to the fixed interest payments).

    The published betas are the betas of shares, and share in a geared company are more risky that they otherwise would be because of the gearing. The asset beta is without the effect of the gearing, and therefore measures just the risk of the actual business.


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    jewel
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    • Topics: 11
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    Thank you John.

    If project will be financed 90% by debt, and company has gearing after tax of: 40% debt to debt + equity. Company financial risk (gearing) should be taken to appraise the investment, right? (not the project financial risk (gearing))


    Avatar of johnmoffat
    John Moffat
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    You should really calculate a WACC for the project.
    However where that change in gearing is so great it would usually be better to calculate the Adjusted Present Value.

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