3. Sources of business and financial risks Consider the following environmental and firm characteristics and determine their effect on a firm's business or financial risk. True or False: Firms with higher levels of fixed-cost sources of financial capital, such as debt or preferred stock, in their capital structures will exhibit higher levels of financial risk, all other things being equal. This statement is: False True The use of financial leverage, or fixed-cost sources of capital, involves a trade-off between its effect on the firm's shareholders and its effect on the riskiness of the firm. Read each statement below, and indicate whether Statement 1, Statement 2, or both statements are correct, or neither statement is correct. Statement 1: In general, the more business risk that a firm experiences, the more financial leverage the firm will want to employ in its capital structure. Statement 2: When its earnings are decreasing, the use of greater levels of debt capital in a firm's capital structure magnifies the negative return earned by the firm's shareholders beyond that earned by the shareholders of an otherwise identical unlevered firm. Which response is correct? Neither statement is correct. Both statements are correct. Only Statement 2 is correct. Only Statement 1 is correct