Question

7. If a firm uses no debt, risk of equity is financial risk, not business risk.

a. True

b. False

8. A firm seeking financial flexibility may borrow less than the optimal level of debt .

a. True

b. False

9. Business risk refers to the extra risk stockholders bear from the use of debt as compared with the risk they would bear without debt use.

a. True

b. False

Answer 1

1.The given statement is False

Financial risk refers to a company's ability to manage its debt and financial leverage.Thus If a firm uses no debt, risk of equity is business risk, not a financial risk.

2.The given statement is True.

Financial flexibilty is used to describe a company's ability to react to unexpected expense and investment opportunities.As the level of debt increases,the risk associated with financial hardship grows.Thus a firm seeking financial flexibility may borrow less than the optimal level of debt.

3.The given statement is False.

Financial risk refers to the extra risk stockholders bear from the use of debt as compared with the risk they would bear without debt use..