If a high percentage of a firm's operating costs are fixed and hence do not decline when demand falls off, this will _____.
A) decrease financial leverage
B) optimize the capital structure of the firm
C) increase the business risk of the firm
D) decrease the firm-specific risk of the firm
E) intensify the risk borne by thefirm's common stockholders

Question

Quizplus · Accepted Answer

A high percentage of fixed operating costs means that the firm's costs will remain the same even if demand declines, putting the firm in a riskier position as there is less flexibility to adjust to changes in the market. Therefore, it increases the business risk of the firm.

If a High Percentage of a Firm's Operating Costs Are