________ is the risk to the firm of being unable to cover fixed financing costs

a. total risk

b. business risk

c. Financial risk

d. diversification risk

Optimal capital structure decisions can lower the cost of capital resulting in higher npv's and more acceptable projects thereby increasing the value of the firm.

True

False

Expert Solution

Not being able to cover the fixed financial cost such as interest expense etc. is called financial risk. As the amount of debt increases the interest expense increases which leads to higher financial risk.

Thus the option (c) is correct.

At optimal capital structure the cost of capital is lowest and lower the cost of capital increases the NPV of cashflows. Thus the value of the firm and projects become higher.

Hence the statement is TRUE.

jeff jeffy answered 2 years ago

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