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 include industry characteristics and economic conditions,both of which are generally beyond the firm's control.
C) One of the benefits to a firm of being at or near its target capital structure is that this generally minimizes the 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 EBIT and business risk.

Question

Quizplus · Accepted Answer

Business risk is affected by factors such as industry characteristics and economic conditions, which are not fully under a firm's control. A firm can take steps to manage and mitigate these risks, but it cannot eliminate them entirely. The amount of debt in a firm's capital structure can affect its financial risk, which in turn can impact its business risk. Being at or near its target capital structure can help minimize the risk of bankruptcy, but it does not eliminate all business risk. Diversification can help to minimize financial risk, but it may not always be possible or feasible for a particular firm. Option A is incorrect because while the financial characteristics of an industry can certainly impact business risk, they do not determine it solely. Option C is incorrect because being at or near target capital structure may minimize the risk of bankruptcy, but it does not eliminate all business risk. Option E is incorrect because the amount of debt in a firm's capital structure can impact its financial risk and ultimately affect its business risk as well.

Which of the Following Statements Is CORRECT