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 variability of a firm's earnings before interest and taxes (EBIT), which affects the cost of equity. Higher business risk leads to higher cost of equity as investors demand a premium for the increased risk.

The Business Risk of a ﬁRm