For each of the following scenarios, explain whether the situation describes fin

Question

For each of the following scenarios, explain whether the situation describes financial risk or business risk. Explain your answers to each scenario using at least one of the references from the background readings:

A) A pharmaceutical company has developed a new cancer treatment drug that has a much higher success rate than other drugs currently in the market. It has the potential to triple the company’s profits. However, the FDA has expressed concern about some side effects, and it is not clear if the FDA will approve the drug.

B) An airline has an EBIT of $100 million per year. However, it also has a huge amount of debt and pays $97 million per year in interest. Its EBIT is relatively stable but tends to go up or down by $5 million or so each year depending on the economy.

C) A basketball franchise earns an EBIT of $50 million a year when its team has a winning year. However, it earns only $10 million when its team has a losing year.

Explanation / Answer

a.

Because of FDA concern, the overall business is affected if new cancer treatment drug is not passd by FDA. SO this type of risk is comes under Business risk.

B.

The company has huge amount of debt in its capital structure and because of that almost all its earnings are paid as interest on debt. excess debt is comes under financial risk of the company.

c.

The basketball franchise earnings flatuates from $50 million in winning year to $10 million in lossing year. it mean winning and lossing game is directly affect overall profitability of the business.

So, this type of risk is comes under business risk.

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