In a firm's life cycle (start-up, growth, mature and decline), business risk is ______ and financial risk is ______ in the early stage.

A. low, low
B. high, low
C. low, high

Correct Answer: B

Understanding the stage of a company's life cycle can help analysts quantify the relative levels of business risk and financial risk. Business risk is highest early in a firm's life cycle, but quite low later on. Implicit in this is that if a firm achieves maturity, there is obviously a proven product-market fit and a viable business model. The inverse is true of financial risk. It's low early on since debt is typically not available, then it gets progressively higher (peaking in the "decline phase" as sales decrease and margins begin to erode).