Question

Blueshift Optical (BLOP) gear has $100 million in equity and $400 million in debt. BLOP can...

Blueshift Optical (BLOP) gear has $100 million in equity and $400 million in debt. BLOP can issue debt at 4.0% while the firm's equity cost of capital is 9%. Based on this information we conclude that BLOP's business risk and financial risk are (in %):

a. 4% and 5% b. 5% and 9% c. 5% and 4% d. 9% and 4%

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Answer #1

Correct Answer is option D
Issue debt at 4% is a financial risk.
Financial Risk - Financial risk is the risk that the company borrow debt and how company use its financial levereage.
More debt means more financila leverage risk.
Business Risk - Business risk is the risk that the company is unabe to make sales and revenue to cover its expenses.

I hope this clear your doubt.

Feel free to comment if you still have any query or need something else. I'll help asap.

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