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: The more fixed costs a firm uses in its production process, the more business risk the firm will exhibit, 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: The objective of capital structure management is to determine the mix of debt and equity that leads to the maximization of the wealth of the firm's shareholders. Statement 2: One result associated with the use of increased financial leverage is a decreased return earned by the firm's shareholders as the firm's earnings increase. Which response is correct? Only Statement 2 is correct. Neither statement is correct. Only Statement 1 is correct. Both statements are correct