Referencing Styles : APA 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 st … View More 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. [20 marks] 2) Gabella’s is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella’s has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Terry owns 400 shares of Gabella’s stock and has decided to continue holding those shares. Using the information provided, you are required to answer the following questions: a) What is Gabella’s earnings per share before its debt issue? Show your calculations. b) What is Terry’s total annual dividend income before Gabella’s debt issue? Show your calculations. c) What is Gabella’s earnings per share after its debt issue? Show your calculations. d) How will Gabella’s debt issue affect Terry’s total annual dividend income? Show your calculations. Read Less