Describe some of the sources of business risk and financial risk. Do financial decision makers have the ability to "trade off" one type of risk for the other?

Students should intuitively recognize that some of the observed variation in capital structures across industries, for example, reflect differences in the nature of the industries themselves; i.e., business risk. Similarly, intuition would suggest that firms with large capital requirements and stable cash flows (e.g., electric utilities) are more likely to be willing to raise funds via large amounts of borrowing. Alternatively, firms with lower tangible asset needs and highly uncertain cash flows (e.g., small software companies) are more likely to employ equity.