Answer the following questions: a) Explain what is meant by business risk and financial risk. b) Assume
Question:
Answer the following questions:
a) Explain what is meant by “business risk” and “financial risk”.
b) Assume that Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain.
c) Why is the use of debt financing referred to as using financial “leverage”? What is “homemade leverage”? Explain.
d) Describe the “trade-off” that defines the static theory of capital structure.
e) You are considering a firm under three separate scenarios: (1) no debt, no taxes, and no bankruptcy costs; (2) with debt and with taxes but no bankruptcy costs; and (3) with debt, with taxes, and with bankruptcy costs. Under which one of these three scenarios will the firm have the highest value? Explain your answer.
Fundamentals of corporate finance
ISBN: 978-0078034633
10th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan