Question

Which comparison of financial risk for debt and equity is correct?

Options

• Debt is lower due to fixed commitments; equity is higher for the business

• Debt and equity both require compulsory dividends

• Debt and equity both have the same fixed repayment commitment

• Debt is higher due to fixed commitments; equity is lower for the business

Answer 1

Debt carries higher financial risk because interest and repayment are fixed commitments. Equity has lower financial risk for the business because it lacks the same compulsory commitments.