BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Proportion of debt in the total capital
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Proportion of equity in the total capital
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Both of the above
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None of the above
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Detailed explanation-1: -The overall financial risk depends upon the proportion of debt in the total capital. The risk of default on payment is known as financial risk which has to be considered by a firm likely to have insufficient shareholders to make these fixed payments.
Detailed explanation-2: -The proportion of debt in the overall capital of a firm is called Financial Leverage or Capital Gearing. When overall debt in the firm increases, cost of funds declines as debt is a cheaper source of funds.
Detailed explanation-3: -It is calculated as the ratio of debt and equity or the proportion of debt in the total capital used by the firm. Algebraically, The proportion of the debt and equity used by the firm affects its financial risk and profitability.
Detailed explanation-4: -Companies take on debt, known as leverage, in order to fund operations and growth as part of their capital structure. Debt is often favorable to issuing equity capital, but too much debt can increase the risk of default or even bankruptcy.
Detailed explanation-5: -The debt-to-equity ratio tells a company the amount of risk associated with the way its capital structure is set up and run. The ratio highlights the amount of debt a company is using to run their business and the financial leverage that is available to a company.