The business risk of a firm:
A) Depends on the level of unsystematic risk associated with the assets of the firm.
B) Is inversely related to the required return on the firm's assets.
C) Is dependent upon the relative weights of the debt and equity used to finance the firm.
D) Has a positive relationship with the cost of equity for that firm.
E) Has no relationship with the required return on a firm's assets according to M&M Proposition II.

Question

Quizplus · Accepted Answer

Business risk is related to the cost of equity because higher business risk increases the risk perceived by equity investors, thus increasing the cost of equity.

The Business Risk of a Firm