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 EPS
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Higher degree of operating risk
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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 debt-to-equity (D/E) ratio reflects a company’s debt status. A high D/E ratio is considered risky for lenders and investors because it suggests that the company is financing a significant amount of its potential growth through borrowing.
Detailed explanation-3: -Higher debt equity ratio results in higher degree of financial risk.
Detailed explanation-4: -In general, if your debt-to-equity ratio is too high, it’s a signal that your company may be in financial distress and unable to pay your debtors. But if it’s too low, it’s a sign that your company is over-relying on equity to finance your business, which can be costly and inefficient.
Detailed explanation-5: -In general, a lower D/E ratio is preferred as it indicates less debt on a company’s balance sheet.