Aspeon Sparkling Water Case

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Corporate FInancial Management | Aspeon Sparkling Water, Inc. Case | Capital Structure | | | 11/20/2013 | | 1 a. Business risk and financial risks are two primary risks that all the companies face in their day-to-day operations. The following table highlights their differences: | Business Risk | Financial Risk | Definition | Business risk is the risk firm’s common stockholders face if the firm had no debt. It is the risk inherent in the firm’s operations, which arises from uncertainty about future operating profits and capital requirements. | Financial risk is the additional risk that common stockholders face as a result of the decision to finance with debt. | Example | Introduction of new product or services in the market. | Percentage of equity financing and debt financing in the company’s capital structure. | Affecting Factors | Variability in the product demand and production costs. | Quality of financial system in which country the company is operating, i.e., how available debt is. | Source: Financial Management; Theory and Practice b. When a company only finances through equity total risk is defined by business risk. But when it is the combination of equity financing and debt financing, total risk is the combination of business risk and financial risk. Total risk can be measured by company’s Return on Equity (ROE). When a company only uses equity financing, its ROE is lower than when company uses both debt financing and equity financing. In the case of debt financing there are interest expenses that lower the net income so ROE is higher. c. The market risk framework consists of investors’ required return for business risk and the required return for financial risk. The risk is measured by beta. A firm

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