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A capital structure decision indicator that focuses on whether equity holders bear adequate compensation for financial risk is:
AOperating Leverage
BWorking Capital
CCombined Leverage
DFinancial Leverage
Answer & Solution
Correct answer: D. Financial Leverage
1. Financial leverage measures the additional risk equity holders bear when debt is used.
2. Higher financial leverage = greater amplification of EBIT changes to EPS.
3. Captures the risk-return trade-off of capital structure.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §3_
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