Question

Higher debt-equity ratio results in (a) lower financial risk (b) higher degree of operating risk (c) higher degree of financial risk (d) higher EPS

Answer 1

Answer :

Higher debt-equity ratio results in : higher degree of financial risk

Among the given options option (c) higher degree of financial risk is the correct answer.

Explanation :

Financial risk is the chance that a firm would fail to meet its payment obligations. It arises with higher use of debt.

Capital structure represents the proportion of debt capital and equity capital to make up the total capital of the firm.

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Financial leverage is called favourable if:

a. Return on Investment is lower than the cost of debt  

b. ROI is higher than the cost of debt  

c. Debt is easily available

d. If the degree of existing financial leverage is low

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Companies with a higher growth pattern are likely to:

a. pay lower dividends  

b. pay higher dividends  

c. dividends are not affected by growth considerations

d. none of the above  

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