Explain why you might expect to observe a negative correlation between financial leverage and operating leverage.

State if each statement is true or false and explain.

Because of the risk-return trade-off.

If a firm is naturally risky because of its operating leverage, the firm may not want to add financial risk.

Because of the WACC.

If a firm is relatively low risk because of low operating leverage, the firm may want to add financial risk.

Note: The correct answer is NOT false, true, false, false