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Uncertainty regarding the net income of a firm

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Ellen Kauer, a senior at UMB College of Management, has been registered for financial management course and sought help from a tutor. During their conversations about the business risk and the optimal capital structure of a firm, the tutor made the following statement:

The main factors that affect the business risk are the ability to adjust output prices and operating leverage and business risk is the uncertainty regarding the net income of a firm. For a levered firm 40/60 debt to equity ratio is the optimal capital structure, which always maximizes the value of a firm.

Do you agree or disagree with the tutor's statement? Briefly explain.

Reference no: EM132403146

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