In: Finance
The debt-equity ratio determines the amount of _____ risk that is associated with a firm.
business |
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systematic |
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unsystematic |
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financial |
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.