Other things held constant, an increase in financial leveragewill decrease a for-profit business’s market risk...

Other things held constant, an increase in financial leverage will decrease a for-profit business’s market risk as measured by its beta coefficient.

True

False

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Answer - false

Reason - financial leverage is determined by the percentage of debt or fixed interest capital present in a businesses capital structure. The more debt available in a business the more it will be paying interest which will make the business more exposed to market. It means the increase in interest increases the firms market risk of business. The beta coefficient measures the firms risk with respect to market, where market risk is 1. If the firms risk is less than 1 it means the firm is less volatile to market shocks and vice versa. And increase of financial leverage will increase the beta coefficient which means the firms market risk is also increased.

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