BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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lower financial risk
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Higher degree of operating risk
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Higher EPS
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Higher degree of financial risk
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Detailed explanation-1: -A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders). Higher use of debt increases the fixed financial charges (Interest on Debt) of a firm. As a result, increased used of debt increases the financial risk of a firm.
Detailed explanation-2: -The data analysis technique used is multiple linear regression. The result of this research shows that Debt to Asset Ratio (DAR) has a significant negative effect on Earning Per Share (EPS), Debt to Equity Ratio (DER) has no significant effect on Earning Per Share (EPS).
Detailed explanation-3: -With higher use of debt, the difference between RoI and cost of debt increases the EPS. This is a situation of favorable financial leverage. In such cases, companies often employ more of cheaper debt to enhance the EPS. Such practice is called Trading on Equity.
Detailed explanation-4: –No, EPS rises with increase in debt, only when the return on investment is more than the cost of debt.
Detailed explanation-5: -Higher debt equity ratio results in higher degree of financial risk.