"Corporate Finance": sales risk
Business risk most likely incorporates operating risk and:
A、 financial risk.
B、 sales risk.
C、 interest rate risk.
The following data apply to two companies producing similar products.
Compared with Company B, Company A has:
A、 a higher degree of total leverage.
B 、a lower sensitivity of operating income to changes in units sold.
C、 the same sensitivity of operating income to changes in net income.
B is correct. Business risk is the combination of sales risk and operating risk.
A is incorrect because does not include financial risk.
C is incorrect because business risk does not include interest rate risk.
B is correct.
The DOL is lower for Company A than Company B (as per the table), meaning Company A’s operating income is less sensitive to a change in the units sold relative to Company B.
A is incorrect. DTL for Company A is lower than for Company B (as per table above).
C is incorrect. DFL for both companies equal to 2.0. However, the interpretation of DFL should be the sensitivity of net income to changes in operating income.