Question

As the financial leverage of a company increases, it leads to:

विकल्प

• A decline in the cost of funds but an increase in the financial risk

• An increase in the cost of funds but a decline in the financial risk

• Both an increase in the cost of funds and financial risk

• Both a decline in the cost of funds and financial risk

Answer 1

A decline in the cost of funds but an increase in the financial risk

Explanation:

• When a company uses more debt (increasing financial leverage), it pays a lower cost of funds because debt is cheaper than equity.
• However, higher debt increases the company’s fixed obligations (interest payments), so the financial risk also increases.