Which concept of financial management affects both the profitability and the financial risk?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Capital structure
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Capital structure refers to the proportion of debt and equity used to finance a business.
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A higher debt component may increase profitability (due to tax benefits of interest) but also raises financial risk (risk of default and fixed interest obligations).
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Hence, capital structure directly affects both profitability and financial risk.