Business risk is the single most important determinant of a firm's capital structure.

Question

Quizplus · Accepted Answer

Business risk refers to the uncertainty and variability of a firm's earnings and profits, which in turn affects its ability to meet financial obligations, such as debt payments. Therefore, firms with higher business risk may prefer to have a lower debt-to-equity ratio in their capital structure to minimize the financial risk associated with their operations. On the other hand, firms with lower business risk may be comfortable with higher leverage and may use more debt financing to enhance their returns to shareholders. Thus, business risk is a crucial factor in determining a firm's optimal capital structure.

Business Risk Is the Single Most Important Determinant of a Firm's