alleryIncreasing the use of debt in the capital structure raises:
Abusiness risk, regardless of financing
Bthe firm's tax-free income
Cthe firm's sales automatically
Dfinancial risk, since fixed interest must be paid regardless of profit
Answer & Solution
Correct answer: D. financial risk, since fixed interest must be paid regardless of profit
More debt means more fixed interest obligations payable regardless of profit, raising financial risk.
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