Final answer:
True is the correct answer, as the use of financial leverage should balance the pursuit of maximized profits with the consideration of associated risks, including the potential for losses and financial distress.
Step-by-step explanation:
The use of financial leverage is a strategy that involves the use of borrowed funds to increase one's investment potential. While it can indeed maximize potential profits due to the larger amount of capital at work, it also amplifies potential losses, making it riskier than operations financed with equity alone. This risk stems from the obligation to repay borrowed funds regardless of a firm's profitability. Hence, when assessing the use of financial leverage, it is essential not only to evaluate the potential for increased profits but also to consider the associated risks.
LibreTextsTM highlights the necessity for firms to have a steady and reliable source of financial capital to survive during periods of low profits or losses. The trade-off between return and risk informs investors that while the rate of return on investments is important, risk management is crucial. In the push and pull of financial markets, if an investment option becomes too risky or the expected return decreases, investors may opt for safer alternatives, showcasing the dynamic nature of financial investments in the presence of risk.
Overall, true is the correct answer to whether the use of financial leverage must consider risk, not just maximizing profit, given that it requires balancing potential gains with the potential for financial distress or failure.