1.Which of the following is NOT associated with (or does not contribute to) business risk? Select...

1.Which of the following is NOT associated with (or does not contribute to) business risk? Select one: a. Demand variability. b. The extent to which operating costs are fixed. c. Sales price variability d. Input price variability. e. The extent to which interest rates on the firm's debt fluctuate.

2"According to the trade-off capital structure theory, when the firm has a debt ratio that is higher than its optimal capital structure, the marginal gain from tax savings is lower than the marginal loss from financial distress and agency costs." True or false?

Select one:

a. False

b. True

Solutions

Expert Solution

1. Fluctuation of interest rates on debt is not related to business risk as it is related to financing, hence it is a financial risk. Rest all the four risks are a business risk as they would affect the operating profitability of the business.

2. True as the debt ratio in comparison to total capital keeps on increasing beyond a certain point, Agency cost and financial distress cost keeps on increasing significantly as compared to the tax shield provided by the debt because fixed repayment obligation of the firm towards debt keeps on increasing.

jeff jeffy answered 1 year ago

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