Match List I with List II.

Choose the correct answer from the options given below :

A-II, B-I, C-IV, D-III

The correct answer is option 3- A-II, B-I, C-IV, D-III.

A. Mix between owners and borrowed funds II. Capital structure.
Capital structure refers to the mix between owners and borrowed funds. These shall be referred as equity and debt. It can be calculated as debt-equity ratio i.e., Debt/Equity or as the proportion of debt out of the total capital i.e., Debt Debt + Equity.

B. Inability of business to meet its obligation of payment of interest I. Financial risk.
When a company increases the proportion of debt in its capital structure, it takes on more financial obligations, such as interest payments and loan repayments. This leads to an increase in financial risk, which is the risk of the company not being able to meet its financial commitments, especially during periods of low revenue or economic downturns.

C. Proportion of debt and equity in overall capital IV. Financial leverage.
Financial leverage- The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as D/E or D/D + E when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases. The impact of financial leverage on the profitability of a business can be seen through EBIT-EPS

D. Decisions that affect the amount of assets, competitiveness and profitability of business III. Capital budgeting decision.
Capital budgeting decisions- Fixed capital refers to investment in long-term assets. Management of fixed capital involves allocation of firm’s capital to different projects or assets with long-term implications for the business. These decisions are called investment decisions or capital budgeting decisions and affect the growth, profitability and risk of the business in the long run. These long-term assets last for more than one year.