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Hello sir! in the second requirement of the question the scenario asks to discuss business risks and financial risks that the company could face.
My attempt to solve this was to first explain what each of those are and then list some business risks that the company could face. And then as discussion about financial risk.
My understanding about business risk and financial risk was that business risk is the volatility in cashflows cause by the industry, operational gearing so would include things like exchange rate fluctuations, political risk, fiscal risk, etc.
And the financial risk is that the additional volatility to free cash flows to equity caused by interest payments. In the Kaplan model answer it was included in financial risk:
currency risk, payment risk and credit risk, etc.
how is that a financial risk shouldn’t all of those included in business risks can you please explain thank u!I am away from home until Monday and will not have access to this question until then.
However business risk is indeed the risk due to the nature of the business. Gearing risk is due to the way in which the company is financed and serves to increase the business risk.
If the company is doing any foreign trading then there will also be the currently risk, payment risk, credit risk etc.. In a sense they are part of the business risk but are not simply due to the nature of the business.
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