Answer (A) is correct . Business risk is the risk of fluctuations in earnings before interest and taxes or in operating income when the firm uses no debt. It is the risk inherent in its operations that excludes financial risk, which is the risk to the shareholders from the use of financial leverage. Business risk depends on factors such as demand variability, sales price variability, input price variability, and amount of operating leverage.
Answer (B) is incorrect because Business risk depends on such factors as amount of operating leverage.
Answer (C) is incorrect because Business risk depends on such factors as demand variability.
Answer (D) is incorrect because Business risk depends on such factors as fluctuations in suppliers’ prices.
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