OR (c) 'Operating risk is associated with cost structure, whereas financial risk is associated with capital structure of a business concern.'…

OR (c) 'Operating risk is associated with cost structure whereas financial risk is associated with capital structure of a business concern'. Operating risk refers to the risk associated with the firm's operations. It is represented by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by revenues and expenses, which are affected by demand of firm's products, variations in prices and proportion of fixed cost in total cost. If there is no fixed cost, there would be no operating risk. Whereas financial risk refers to the additional risk placed on firm's shareholders as a result of debt and preference shares used in the capital structure of the concern. Companies that issue more debt instruments would have higher financial risk than companies financed mostly by equity.