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Unformatted text preview: the same information about the firm’s investment prospects, and (4)
investor ability to borrow at the same rate as corporations. CHAPTER 11 Leverage and Capital Structure 439 Business Risk In Chapter 10, we defined business risk as the risk to the firm
of being unable to cover its operating costs. In general, the greater the firm’s
operating leverage—the use of fixed operating costs—the higher its business risk.
Although operating leverage is an important factor affecting business risk, two
other factors—revenue stability and cost stability—also affect it. Revenue stability reflects the relative variability of the firm’s sales revenues. Firms with reasonably stable levels of demand and with products that have stable prices have stable
revenues. The result is low levels of business risk. Firms with highly volatile product demand and prices have unstable revenues that result in high levels of business risk. Cost stability reflects the relative predictability of input prices such as
those for labor and materials. The more predictable and stable these input...
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- Spring '14