Which concept of financial management affects both the profitability and the financial risk?

Option 1 -> Financial planning is a broad process of managing financial resources but doesn't directly create the trade-off between profitability and financial risk.

Option 2 -> Capital structure represents the mix of debt and equity financing, which directly impacts both profitability through financial leverage and financial risk through debt obligations.

Option 3 -> Working capital primarily affects liquidity and operational efficiency rather than creating a direct profitability-risk trade-off.

Option 4 -> Fixed capital refers to long-term assets and investments but doesn't inherently affect the profitability-risk relationship like financing decisions do.

Hence, Option 2: Capital structure -> Capital structure (debt-equity mix) simultaneously affects both profitability and financial risk. Higher debt increases financial leverage, which can amplify returns and enhance profitability through tax benefits and lower cost of debt. However, it also increases financial risk due to fixed interest obligations and potential solvency issues. This creates the fundamental risk-return trade-off in financial management -> correct