Business Studies

Business Finance

Easy

Higher Debt-Equity Ratio results in ______

Lower Financial Risk

Higher degree of operating risk

Higher degree of financial risk

Higher earning per share

✅ Correct Option: 3

Option 1 -> A higher Debt-Equity ratio increases fixed financial obligations, thereby increasing (not lowering) financial risk.

Option 2 -> Operating risk relates to business operations and fixed operating costs, not capital structure. Debt-Equity ratio affects financial risk, not operating risk.

Option 3 -> Higher debt creates greater fixed interest payment obligations, increasing the probability of financial distress and inability to meet debt commitments.

Option 4 -> While leverage can potentially increase EPS, this is conditional on profitability and cost of debt - it's not a guaranteed or direct consequence of higher Debt-Equity ratio.

Hence, Option 3: Higher degree of financial risk -> A higher Debt-Equity ratio means the company relies more heavily on debt financing, which creates mandatory interest payments regardless of profitability. This increases fixed financial charges and the risk of default or bankruptcy if cash flows are insufficient, directly elevating financial risk -> correct

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Higher Debt-Equity Ratio results in ______

Solution

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