Question

Describe how the following three subjects are interrelated: (give an example) a. Capital structure  b. Leverage   c. Risk   

Answer 1

Leverage is a part of capital structure and leverage is usually denoted as overall debt capital which is a part of the capital structure of the company and leverage will always be having a risk associated with it in terms of solvency because when the higher amount of leverage will be there in the overall capital structure, it will mean that there would be an increased amount of liquidity and solvency risk in association with the company's existence because the company will be having the fixed debt repayment obligation along with fixed redemption obligation and hence it can be said that leverage is related to higher risk and presence of leverage in the capital structure will be determined by the benefit associated with the leverage along with trading of that benefit with the cost of financial distress.