The
answer to the question is highlighted in red.
Explanations are highlighted in green.
1. Everything else equal, which of the
following situations would cause a firm’s business risk to decrease?
a. less
stable sales
b. decreased
common equity in the firm’s capital structure
c. less
certain input prices
d. greater flexibility in adjusting
selling prices
e. higher
degree of financial leverage
The more flexibility a firm has with respect to changing its
selling prices, the less risk it has because prices can be more easily adjusted
to help cover fixed operating costs regardless of economic conditions. All of
the other answers would increase the risk associated with a firm.
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