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