Business decisions and managerial risk: A note on the decision analysis approach

A difficult lesson for managers to learn is the importance of evaluating risk in financial decision-making. Risk associated with the substitution of debt for equity in the firm’s capital structure is a determining factor in financial decision-making. In this paper, an instructive model incorporating the structure of decision analysis is developed in order that managers may visualize clearly the monetary loss and gain associated with different debt to equity ratios. This model in turn permits the interpretation of risk in monetary terms.