Which of the following statements about business risk and financial risk is least accurate? A) Business risk is the riskiness of the company’s assets if it uses no debt. B) The greater a company’s business risk, the higher its optimal debt ratio. C) Factors that affect business risk are demand, sales price, and input price variability. Your answer: A was incorrect. The correct answer was B) The greater a company’s business risk, the higher its optimal debt ratio. The greater a company’s business risk, the lower its optimal debt ratio. The answer doesn’t make sense to me, shouldn’t the debt ratio only affect financial risk?
least
Yes, debt ratio affects financial risk but business risk affects the level of debt a company is willing to take. If you are in very risky business you will be reluctant to take additional debt, so your optimal debt ratio will be lower. Cheers