A ﬁrm's systematic risk will ____________ as its debt/equity ratio __________.
A) Increase; increases.
B) Decrease; increases.
C) Remain unchanged; decreases.
D) Remain unchanged; increases.
E) First increase, and then decrease; increases.

Question

Quizplus · Accepted Answer

As a firm's debt/equity ratio increases, its financial leverage increases. This increased financial leverage leads to increased financial risk, which increases the firm's systematic risk. Therefore, systematic risk will increase as debt/equity ratio increases.

A ﬁRm's Systematic Risk Will ____________ as Its Debt/equity Ratio