The use of debt finance by a company (gearing)has a potential impact on which of the following?

Question

Quizplus · Accepted Answer

The use of debt finance (gearing) has a potential impact on all of the given factors. 
A) The return obtained by the shareholder is affected because when a company uses debt, it has to repay it with interest, which reduces the net profit available for distribution to shareholders. 
B) The variability of net profit is influenced because the interest payments on debt are fixed, which means that when a company's profits fluctuate, the interest payments on debt remain the same. This increases the variability of net profit. 
C) The risk associated with the company is affected because the use of debt increases the financial risk of the company. This is because the company has to repay the debt regardless of its profit situation, which can lead to bankruptcy if the company is unable to repay its debts.

The Use of Debt Finance by a Company (Gearing)has a Potential