Question

Higher debt-equity ratio results in

Options

• lower financial risk

• higher degree of operating risk

• higher degree of financial risk

• higher EPS

Answer 1

higher degree of financial risk

Explanation - 

When the share of debt in total capital is larger, the debt-to-equity ratio is higher. This entails a greater level of financial risk. This is because, in the event of a debt, a company is required to pay interest and refund the principal to the borrowers. As a result, increasing debt raises the company's financial risk.