Higher Debt-Equity Ratio results in ______.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Higher degree of financial risk
A higher debt-equity ratio means the company has more borrowed funds (debt) compared to owners’ funds (equity). This increases the company’s obligation to pay interest and repay loans, which raises its financial risk. If earnings decline, the company may find it difficult to meet these fixed financial commitments, making it more vulnerable to insolvency.