Evidence that a firm has high business risk would be provided by its volatile: A. operating profit B. Fixed costs C. Profit after taxes D. Sales Correct answer is A. Very clear why B&C don’y make sense… can someone explain why D is an incorrect answer?
This seems like a tricky question. Business risk is a result of sales risk and operating risk. Sales risk relates to answer D while operating risk refers to answer B. I think C is pretty much irrelevant. My guess would be that A is the correct answer because it incorporates answers D and B, making it the most accurate answer.
Mr. Clean - Thanks for confirming my thoughts. I know business risk is defined as variability in operating income, but it is counterintuitive to say volatile sales won’t result in volatie operating profits. Thanks for your input. Seems like Q-Bank has quite a few gray-area questions… better get through this stuff so I can start on the CFAI practice tests!