BACHELOR OF BUSINESS ADMINISTRATION

Detailed explanation-1: -Ans. A firm’s lower business risk indicates that a firm has lowered operating cost and can raise more capital by issue of debt securities. Whereas, at the time of high business risk, it should depend upon equity.

Detailed explanation-2: -Debt is often favorable to issuing equity capital, but too much debt can increase the risk of default or even bankruptcy. Operating leverage and financial leverage are two key metrics that investors should analyze to understand the relative amount of debt a firm has and if they can service it.

Detailed explanation-3: -Companies that invest large amounts of money in assets and operations (capital-intensive companies) often have a higher debt ratio. For lenders and investors, a high ratio means a riskier investment because the business might not be able to make enough money to repay its debts.

Detailed explanation-4: -Debt is often cheaper than equity, and interest payments are tax-deductible. So, as the level of debt increases, returns to equity owners also increase-enhancing the company’s value. If risk weren’t a factor, then the more debt a business has, the greater its value would be.