Read the following passage and answer the question.

Neeru, the finance manager, and Mani, the managing director of ABCD Ltd., were discussing how to raise funds for modernizing their existing plant. Neeru suggested using equity, pointing out that the Sensex has risen by 6,000 points in the last 4 years. However, Mani wanted to choose debt as the source of finance. The company has high operating costs over time.

Higher debt-equity ratio results in..............

Higher degree of financial risk

The correct answer is option 2- higher degree of financial risk.

A higher debt-equity ratio means that a company is financing a larger portion of its operations through debt rather than equity. This increases its financial risk, as the company will need to make regular interest payments and repay the principal amount regardless of its financial performance. This could lead to greater financial stress, especially if the company faces downturns in business or cash flow issues. So, the correct answer is higher degree of financial risk.