Question

The debt-equity ratio determines the amount of _____ risk that is associated with a firm.

		business
		systematic
		unsystematic
		financial

Answer 1

Answer: The correct answer is financial risk.

Explanation:

Business risk refers to the company's ability to generate sufficient revenue to cover its operational expenses. A company with no debt also may not be able to generate sufficient revenue to cover its operational expenses. Debt-equity ratio does not determine business risk.

Systematic risk means the possibility of loss associated with the whole market or market segment.

Unsystematic risk means risk associated with a particular industry or security.
Systematic risk is uncontrollable whereas the unsystematic risk is controllable

Financial risk refers to a company's ability to manage its debt and financial leverage. Financial leverage simply means the presence of debt in the capital structure of a firm. Debt to equity ratio (Debt/Equity) measures debt in the capital structure of a firm.