1. One of the causes of the recent financial crisis in the United States has been excessive
risk taking due to underestimation of risk. Examine how this relates to financial leverage.
Can overestimation of risk also be detrimental? Unit 1
Financial leverage is defined as the amount of debt a firm uses to buy more assets. Firms use
financial leverage to avoid using too much equity to fund operations. Excessive amounts of
financial leverage can increase the risk of failure because it can become difficult to repay the
debt if a firm uses too much.
The recent debt crisis the United States suffered was from investors taking on financial products
without understanding the risks associated with them because they had become complacent in
