[amp_mcq option1=”Tax should would not be available on new debt” option2=”P.E. Ratio would increase” option3=”Equity shareholders would demand higher return” option4=”Rate of Return of the company would decrease” correct=”option3″]<\/p>\n
The correct answer is: C. Equity shareholders would demand higher return.<\/p>\n
When a company increases its proportion of debt, it increases its financial risk. This is because debt financing is a form of leverage, which means that a small change in the company’s profits can lead to a large change in its earnings per share (EPS). As a result, equity shareholders will demand a higher return on their investment to compensate for the increased risk.<\/p>\n
Option A is incorrect because interest payments on debt are tax-deductible. This means that the company’s tax bill will be lower if it finances its operations with debt.<\/p>\n
Option B is incorrect because the P\/E ratio is a measure of a company’s valuation, not its financial risk. The P\/E ratio is calculated by dividing the company’s stock price by its earnings per share. A higher P\/E ratio indicates that investors are willing to pay more for the company’s stock, which may be due to factors such as the company’s growth prospects or its competitive position.<\/p>\n
Option D is incorrect because the rate of return of a company is not affected by its financial risk. The rate of return is a measure of the company’s profitability, and it is calculated by dividing the company’s net income by its assets. A higher rate of return indicates that the company is more profitable.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”Tax should would not be available on new debt” option2=”P.E. Ratio would increase” option3=”Equity shareholders would demand higher return” option4=”Rate of Return of the company would decrease” correct=”option3″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-44808","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\n