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How does high business risk affect firm risk? Higher business risk increases the volatility of capital...

How does high business risk affect firm risk?

Higher business risk increases the volatility of capital structure.
Higher business risk increases the volatility of EBIT.
Higher business risk increases the volatility of financial costs.
Higher business risk increases the volatility of the firm's asset structure.

Solutions

Expert Solution

Correct option:

Higher business risk increases the volatility of EBIT.

Explaination for wrong options:

Higher business risk increases the volatility of capital structure- not applicable because capital structure would change when there is addition or removal of debt or equity

Higher business risk increases the volatility of financial costs- It is a viable option but the effect is not straigh forward as it would take some time for financial costs to increase in reponse to increased risk. Also volatility increases risk so costs increase but not the volatility

Higher business risk increases the volatility of the firm's asset structure- may change but again in the long term.

jeff jeffy answered 2 years ago
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