The total risk in a firm is determined by evaluating the firm's business risk and financial risk. True or False: All other things being equal, firms with greater stability in their sales over different phases of the business cycle exhibit lower levels of business risk: True False 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. Statement 1 When its earnings are increasing, the use of greater levels of debt capital in a firm's capital structure magnifies the positive return earned by the firm's shareholders beyond that earned by the shareholders of an otherwise identical unlevered firm. Statement 2 One result associated with a firm's use of increased financial leverage is an increase in the firm's risk of insolvency. Indicate the correct statement. Both statements are correct. Only Statement 1 is correct. Only Statement 2 is correct. Neither statement is correct. As an analyst, Olivia is comparing two nearly identical manufacturing firms: Lost Pigeon Manufacturing Company and Golden Fish Production Inc. It is your job to evaluate the relative business and financial risks of Lost Pigeon and Golden Fish. The two firms possess the same value of total assets, and earn ldentical levels of expected operating profit (as measured by the firms' earnings before interest and taxes, or EBIT), but they differ in two critical characteristics: their amount of total debt and the standard deviation of their expected EBIT. The following table deseribes several of Lost Pigeon's and Golden Fish'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? Use the given financial data to indicate which firm has the higher degree of each type of risk. Which firm has more business risk? Lost Pigeon Golden Fish Which firm has more financial risk? Lost Pigeon Golden Fish