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False True The use of financlal leverage, or fixed-cost sources of capital, involves a trade-off between its effect on the firm's shareholders and its effect on riskiness of the firm. Statement 1 In general, the more business risk that a firm experiences, the more financial leverage the frm will want to employ in its capital structure. Statement 2 When its earnings are decreasing, the use of greater leveis 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. Indicate the correct statement. Only Statement 2 is correct. Both statements are correct. Only Statement 1 is correct. Neither statement is correct. As an anslyst, Olivia is comparing two nearly identicat manufacturing firms: Green Rabbit Manufacturing Company and Blue Mouse Production Inc. It is your job to evaluate the relative business and financial risks of Green Rabbit and Blue Mouse. The two firms possess the same value of total assets, and earn identical leveis of expected operating profit (as measured by the firms' earnings before interest and taxes, or Ea1T), but they differ in two critical characteristics: their amount of total debt and the standard deviation of their expected eart. The following table describes several of Green Rabbit's and Blue Mouse's major attributes: Use the given financlal data to indicate which firm has the higher degree of each type of risk. Which firm has more business risk? Green frobbit The two firms possess the same valoe of total assets, and earn identical levels of expected operating profit (as measured by the firms' earnings betore interest and taxes, or EBIT), but they differ in two critical characteristics: their amount of total debt and the standard deviation of their expected Earr. The following table describes several of Green Rabbit's and Blue Mouse's major attributes: Use the given financial data to indicate which firm has the higher degree of each type of risk. Which firm has more business risk? Green Rabbit Bive Mouse Which firm has more financial risk? Bive Mouse Green Rabbit