Business and Financial Environment - Essay Example

Only on StudentShare

Extract of sample
Business and Financial Environment

As the company includes more and more debt to its capital structure the rate of Return required by the company increases. WACC which comprises of weighted average of cost of Debt and cost of Equity increases as the firm is exposed to more and more debt. The increase in debt increases the risk of the company and as the debt to equity ratio in a capital structure of the firm increases the Return on Equity required by the firm increases which increases the WACC for the firm. This will also increase the amount of earnings required by the firm to keep its value to its previous position.
This risk inherent for an organization due to its operations is called business risk. It is the risk of a firm when it uses no debt. Technically or in terms of formulation it is the uncertainty in the future returns on assets of a firm (ROA). We can write ROA as:
This gives us a way to measure the business risk of an un-levered firm i.e. measuring deviations in the ROE of that firm. Such a business risk is called firm's Basic Business Risk. "Business risk is the uncertainty associated with operating cash flows of a business. ...
Download paper

Summary

Organizations, when operate, face different type of risks. If the organization is financed all through equity, then stockholders will face the risk inherent in the operations of that business which is called the Business Risk. Business risk is influenced by many factors which include Demand Variability, Price Stability, Input Cost Variability, Adaptability of output prices with the changes in input prices, Ability to develop new products and Degree of Operating Leverage…
Author : antoinettekilba

Related Essays

International Business Environment Essay
Basically globalization and technological revolution create investment opportunities for organizations worldwide. The economic factors can range from big to small, from local to national to international, from current to future, from rising costs of raw materials to the market entry of a new rival, from forthcoming budget to the instability of international exchange rates, from the current availability of investment of funds to the likely future cash flow from a new product. Business must constantly take such factors into account when devising and acting upon its business strategy. It is...
6 pages (1506 words) Essay
International Business Environment
Once a British colony, Kuwait's independence was granted in 1961. Throughout, its economy's survival is almost entirely bolstered by its oil production and sales. With the income, the government can have considerable support for its revenues, and attract in foreign workers (Factsheet, 2007).
...
14 pages (3514 words) Essay
business environment Research Proposal
With focus in areas of corporate, retail, investment banking and asset management, Bank Muscat has made forays into international markets including India, and Bahrain.
...
14 pages (3514 words) Research Proposal
Todays business environment
The new external factors are new people, their culture, society, language, political system, work habits, social system, regulatory system, and taxes legal and technological base. Legislations and government rules and laws determine the political environment of the new country. Every country in the world follows its own system under the sovereign rule and the company who enters into that country has to follow those laws and systems. Economic environment is also different in that country because economic requirement, financial system export/ import requirements may be different to those in the...
8 pages (2008 words) Essay
Business Environment
(i) Political factors: These factors include but not limited to political and legal structures, political alliances, foreign trade legislation, trade union power, pressure groups, taxation policies, legislature structures, employment legislation and monopoly restrictions.
...
7 pages (1757 words) Essay
Business environment
There are many reasons for this change in the external environment as organizations are fighting their way to reclaim their original position in the market. Large banks such as Northern Rock failed to sustain itself despite support from Bank of England and such the carryover effects are even felt by the organizations working in other sectors of the economy.
...
7 pages (1757 words) Essay
Business Environment
Although the organization is well capitalized and enjoys a global presence, its reputation has constantly been at stake following several fines related to environmental pollution and inadequate maintenance of equipment and facilities. The company has also been accused of ranking poorly in terms of upholding human rights according to some quarters. In view of the company’s business environment, it may well be concluded that the company has a bright future although it needs to make certain adjustments to continue achieving astronomical growth. The research and findings of this report are based...
20 pages (5020 words) Essay
Got a tricky question? Receive an answer from students like you! Try us!