BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the proportion of debt in overall capital
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the proportion of equity in overall capital
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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: -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.
Detailed explanation-4: -Ans. Financing decision determines the overall cost of capital and the financial risk of the enterprise.
Detailed explanation-5: -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.