Which of the following statements is CORRECT?
A)A firm's business risk is determined solely by the financial characteristics of its industry.
B)The factors that affect a firm's business risk are affected by industry characteristics and economic conditions.Unfortunately, these factors are generally beyond the control of the firm's management.
C)One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
D)A firm's financial risk can be minimized by diversification.
E)The amount of debt in its capital structure can under no circumstances affect a company's business risk.

Question

Quizplus · Accepted Answer

A firm's business risk is affected by various factors such as industry characteristics, economic conditions, competition, regulatory environment, etc. These factors are generally beyond the control of the firm's management. Hence, option B is correct. Option A is incorrect because a firm's business risk is not solely determined by the financial characteristics of its industry. Option C is incorrect because being at or near the target capital structure does not eliminate the risk of bankruptcy. Option D is partially incorrect because diversification can minimize a firm's financial risk, but not its business risk. Option E is incorrect because the amount of debt in a firm's capital structure can affect its business risk, as higher debt levels can increase financial leverage and thus increase the risk of financial distress.

Which of the Following Statements Is CORRECT