As a firm increases its use of debt, it becomes more financially leveraged and riskier.

Question

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As a firm uses more debt, its level of financial leverage increases, which means that it has a greater proportion of debt in its capital structure. This can result in higher interest payments and greater financial risk, as the firm must continue to make payments even if profits decline. Therefore, increased debt usage typically leads to an increase in financial risk.

As a Firm Increases Its Use of Debt, It Becomes