Business risk applies to levered ﬁrms but not to unlevered ﬁrms.

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Business risk applies to all firms, regardless of their leverage status. Business risk is the risk associated with the firm's operations, such as competition, market demand, and technological changes. Leverage amplifies the impact of business risk on the firm's earnings and cash flows, but it does not create or eliminate business risk. Unlevered firms still face business risk, but they do not face financial risk, which is the risk associated with the use of debt financing.

Business Risk Applies to Levered ﬁRms but Not to Unlevered