Business, 05.08.2020 18:01 lilybean7815

The use of financial leverage, or fixed-cost sources of capital, involves a trade-off between its effect on the firm's shareholders and its effect on the riskiness of the firm. Read each statement below, and indicate whether Statement 1, Statement 2, or both statements are correct, or neither statement is correct. Statement 1
1. When its earnings are increasing, the use of greater levels of debt capital in a firm's capital structure magnifies the positive return earned by the firm's shareholders beyond that earned by the shareholders of an otherwise identical unlevered firm
Statement 2
2. One result associated with a firm's use of increased financial leverage is an increase in the firm's risk of insolvency.
Which response is correct?
a. Both statements are correct.
b. Only Statement 1 is correct
c. Only Statement 2 is correct
d. Neither statement is correct.

Answers: 3

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