Holding all other factors constant, a firm that is subject to a greater level of business risk should employ less financial leverage than an otherwise equivalent firm that is subject to a lesser level of business risk.

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This is because a firm with more business risk is more likely to experience fluctuations in its earnings, making it harder to meet debt obligations. Therefore, to reduce the risk of bankruptcy or default, the firm should rely less on debt financing and instead use more equity financing.

Holding All Other Factors Constant, a Firm That Is Subject