Effect Of Leverage On Business And Finance Risk

📄 Project Abstract

In corporate finance it is common to decompose the riskiness of a firm into business risk and finance risk, this categorization allows one to analyze separately the sources of risk that are inherent in most firms. Business risk is usually viewed as the uncertainty in sales and the degree of operating leverage. Financial risk refers to uncertainty in future net income due to the fixed costs of using debt financing or financial leverage. (Morgan and zumalt 1980). Luoma and Spiller (2002) points that the trade-off between a potentially higher Shareholders return and the potential decreases in financial strength and solvency is an important part of making financing decisions because inappropriate financing decisions make firm's risk larger. Furthermore, luoma and Spiller (2002) discover that a particular usage of preferred stock and debt in financing the firm's assets creates financial risk which is directly associated with firms financial leverage. Levy and Sarnat (1994), the impact of ...