Which of the following statements is CORRECT?
A) The factors that affect a firm's business risk are affected by industry characteristics and economic conditions.Unfortunately, these factors are generally beyond the control of the firm's management.
B) One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
C) A firm's financial risk can be minimized by diversification.
D) The amount of debt in its capital structure can under no circumstances affect a company's business risk.
E) A firm's business risk is determined solely by the financial characteristics of its industry.

Question

Quizplus · Accepted Answer

Business risk is influenced by factors such as industry characteristics and economic conditions, which are often beyond a firm's control. It is important for firms to identify and manage these risks to avoid negative consequences. The other statements are incorrect. B is incorrect because being at or near the target capital structure does not eliminate the risk of bankruptcy, as there are other factors that can lead to bankruptcy. C is incorrect because diversification is a strategy to reduce portfolio risk, not financial risk. D is incorrect because the amount of debt in a company's capital structure can affect its business risk, as too much debt can lead to financial distress. E is incorrect because a firm's business risk is influenced by a variety of factors, not solely financial characteristics.

Which of the Following Statements Is CORRECT