Risks Facing the Firm and Its Stockholders

Risks Facing the Firm and Its Stockholders - 6. The degree...

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Risks, As Presented in a Firm's Income Statement,  Facing the Firm and Its Stockholders  Business Risk  =  The   variability or uncertainty in a  firm’s operating income (EBIT) resulting  from any one or a combination  of the  following: 1. Uncertainty  about demand  (sales) for outputs 2. Uncertainty  about selling prices for outputs   3. Uncertainty  about input  costs 4. Market power  (relates to the control of output   selling prices and  input  costs) 5. Product or other types of liabilities (added  to the  textbook's listing)
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Unformatted text preview: 6. The degree of operating leverage - the use of fixed operating costs as opposed to other operating costs Financial Risk = The variability or uncertainty of Earnings Per Share (EPS) and the increased probability of insolvency resulting from a firms use of fixed, interest-bearing sources of funds (debt and preferred stock) in its capital structure. EPS = (Net Profit After Tax - Preferred Stock Cash Dividends) / # of Common Shares of Stock Outstanding...
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