FAIR VALUE TELEVISION: SALES VOLATILITY, BUSINESS RISK, AND FINANCIAL LEVERAGE

Business risk and financial risk are among the most important concepts in corporate finance. The total risk of a corporation is the sum of its business risk and financial risk. Business risk is the risk of the corporation before the financing decision. It is the uncertainty inherent in the corporation’s future operating income. An important cause of business risk is sales volatility. Financial risk is the added risk caused by debt financing. Using financial leverage increases the total risk of the firm by increasing the volatility of a corporation’s net income and return on equity. The case provides an opportunity for students to understand the determinants of business risk, financial risk, and market value in a real-world setting. Fair Value Television (FVT) is a television retailer in California with a high sales volatility and business risk due to competition. The company is considering the effect of increasing financial leverage on its return on equity and common stock value.