apia Home Grades Personalized Reviews DiscussionCourse Materials Final Exam -Chapters 7-11, 14, 16 Deadline Today at 09-00 PM Altempts 24 Capinal sSeructure and Leverage: Business and Financial Risk Capital Structure and Leverage: Business and Financial Risk ndustry. In addition, it can aso change over time A commonly used measure ofSeletrak is the standard deviation of the frm\'s product otsolescenoe, foreign niak exposure, regulatory risk See rnisk is the single most important determinant of capital structure, and iR is the risiiness inherent in the firm\'s operations if it uses no debt. It can vary from one industry to another and also among ferms in a given return on inwested capital (RDIC). Remember that ROIC doesn\'t vary with changes in capital structure, so the standard deviation of ROIC measures the undeying risk of the frmeconaidt ffects of debe fnancing. A rumber of actors affecteect and legal exposure, and rct-which is defined as the extent to which fixed costs are used in a firm\'s operations. These factors are determined partly by industry characteristics and partly by managerial decisions leverage. The use of debt concentrates the ncreases expected EPS but t stock) ane used in a firm\'s capital structure.Salect 8)nsk is an increase in stockholders risk, over and above the frm\'s baskc Seect: frm\'s business risk on osholders Typicalty, nisk, resulting from the use of using debt increases the expected rate of return for an investment. However, debt also common stockholders More increases rnisk. When a firm is determining its optimal capital structure, it needs to balance these positive and negative effects of t also increases Seet leverage. Give the corect response to the foilowing questions Compeny X has a higher degree of financial rnisk than Company Y. Company Firm A has more business risk than Firm 8, but they X can offset this by lowering its operating leverage. True or false both have the same total nsk Which of the following statements must be true? \"\" ?? onar to onset its higher busness risk, Firm A wil i ncrease its operating leverage so that es total risk is the same as Firm B\'s A has more business risk than Pirm 8, es debt r ratio will be greater than Because Firms ras less debt ratiowill be lower than Firm A\'s of the statements above are The correct resporse is e
1.Business risk is the single most important determinant of capital structure
2. A commonly used measure of business risk is the standard deviation.
3. Standard deviation of ROIC measures the underlying risk of the firm before considering the effects of debt financing.
4. A number of factors affect business risk including competition, demand variability, sales price variability, input cost variability, product obsolence, foreign risk exposure, regulatory risk and legal exposure, and operating leverage which is defined as the extent to which fixed costs are used in firm\'s operations.
5. Financial Leverage is the extent to which fixed-income securities (debt and preferred stock) are used in a firm\'s capital structure
6. Financial Risk is an increase in shareholders\' risk, over and above the firm\'s basic business risk resulting from use of financial leverage .
7. When firm is determining its optimal capital structure, it needs to balance these positive and negative effects of financial leverage
8. False. Company X needs to lower financila leverage
9. None of the statements are true
Homework Sourse
