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Business risk

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Business risk

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 19, 2021 at 9:46 pm #621120
    Faizahmad1009
    Member
    • Topics: 33
    • Replies: 20
    • ☆☆

    Financial risk can be calculated with the Gearing ratio AND Business risk can be calculated with the Operating Gearing (Contribution / PBIT)

    I know that with gearing ratio we are looking for risk of debt borrowing which will affect the company cost of capital but what exactly are we looking for when calculating Operating Gearing?

    Is it correct that with Operating gearing we are looking unsystematic risk of the company?

    May 20, 2021 at 7:31 am #621164
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    The business risk is the risk of the business itself which is partly due to systematic risk (the effect of general economic factors which depends on the type of business) and unsystematic risk (which is factors specific to the particular business of which the level of operating gearing is one factor).

    The financial risk is due to the level of gearing and makes the shares in the company more risky that the risk of the business.

    May 20, 2021 at 4:59 pm #621219
    Faizahmad1009
    Member
    • Topics: 33
    • Replies: 20
    • ☆☆

    Sir, you did not say whether:

    1) Financial risk can be calculated with the Gearing ratio AND Business risk can be calculated with the Operating Gearing (Contribution / PBIT)

    2) What exactly are we looking for when calculating Operating Gearing?

    3) Is it correct that with Operating gearing we are looking at unsystematic risk of the company?

    Thank you! 🙂

    May 20, 2021 at 5:24 pm #621227
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    I did answer all of those questions!!!!

    1. The financial risk is only related to the level of financial gearing. The level of financial gearing makes the shares more risky than they otherwise would be.

    2. Operating gearing measures how the operating expenses of the business are split between fixed costs and variable costs (as I explain in my free lectures).

    3. The level of operating gearing is one part of the unsystematic risk of a business.

    Do read my reply again, and do watch my free lectures.

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