Question

Public utility firms typically have a high level of outstanding debt. Given the concepts of business risk and financial risk, why do you think this happens? Please explain.

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Business risk and financial risk refers to the incidence of fixed costs on the profits of the company. While business risk stems from the fixed costs of operations, financial risk stems from the use of high levels of debt in the capital structure. In the case of public utility companies, the use of high levels of debt is done so as to optimize the cost of capital for the company....

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