The business risk of a firm:
A)depends on the firm's level of unsystematic risk.
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 firm's cost of equity.
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 firm's cost of equity because higher business risk increases the uncertainty of returns, leading investors to demand a higher return for the increased risk.

The Business Risk of a Firm