Question

What are the risks of under levering a company? What are the risks of over levering a company

Answer 1

Risks related to under levereging a company are as follows-

A. lack of raising of debt capital would be leading to lack of growth of the company for the longer period of time

B. lack of raising of debt capital will also mean that the company is not utilising the optimum capital structure.

C. it will also mean that the market capitalisation of such companies will be lower because these companies are having a very high presence of equity shares and their Earning per share will be very lower

D. it will also mean that there is an ignorance on the part of the company of use of credit because businesses cannot flourish without use of credit in long run.

Risk of over leveraging business -

A. it can lead to creation of the solvency risk for the company in the long run and it would be leading to a risk related to shutdown of the company

B. it will also mean that the company will not be having enough liquidity in its hands in the short run as it will have a higher amount of interest payable

C. There will be lack of profit reporting on the part of the company because these companies are not able to to provide higher profits to the shareholder as they are trying to set off its debt repayment

D. It can also mean that the company will not be able to generate higher debt capital from the market because it is already overleveraged.