Which of the following statements is correct?
A) A firm's business risk is solely determined by the financial characteristics of its industry.
B) The factors which affect a firm's business risk are determined partly by industry characteristics and partly by economic conditions.Unfortunately,these and other factors which affect a firm's business risk are not subject to any degree of managerial control.
C) One of the benefits to a firm of being at or near its target capital structure is that financial flexibility becomes much less important.
D) The firm's financial risk may have both market risk and diversifiable risk components.
E) The above statements are all false.

Question

Quizplus · Accepted Answer

The statement in option D is correct. Financial risk of a firm can have both market risk and diversifiable risk components. Option A is incorrect because business risk is also affected by factors within the firm such as management ability, product differentiation, etc. Option B is incorrect because managerial decisions and actions can impact business risk to some extent. Option C is incorrect because being at target capital structure does not eliminate the need for financial flexibility, as unexpected events or opportunities may still arise. Option E is clearly incorrect as at least one statement, option D, is correct.

Which of the Following Statements Is Correct