What is the effect of a company's capital structure on its overall risk?

The choice that indicates the effect of a company's capital structure on its overall risk is valid because the capital structure — the combination of debt and equity that a company uses to finance its operations — plays a crucial role in determining the financial stability and risk profile of the business. A well-balanced mix of debt and equity can reduce a company's overall risk by ensuring adequate liquidity and the ability to absorb shocks from earnings volatility.

Debt financing tends to magnify both returns and risks; while it can lead to higher returns during good times, excessive debt can expose the company to the risk of bankruptcy during downturns. Conversely, equity financing can provide stability, as it does not require obligatory payments, but it may also dilute ownership and affect control. Thus, the balance between these two financing sources, as indicated in the correct answer, directly influences the risk associated with the business's operations and its financial health.

The other choices fail to capture this complex relationship adequately. For instance, claiming that more debt leads to lower risk ignores the well-recognized risk associated with high levels of leverage. Stating that capital structure does not influence risk disregards foundational financial principles. Finally, the assertion that more equity leads to higher business ownership does not adequately reflect the broader impacts of capital