Case Solution

If the company has more debt into the capital structure it is likely to experience the
financial distress. So, it can be determined that company’s has to be balanced into the
capital structure policy to avoid being trapped into the financial distress costs which
includes the cost of bankruptcy, indirect costs such as costs reduction into the research and
development, and also loosing trust among the investors, customers and vendors as
well.Similarly, if the company increases its financial leverage then it would become more
risker into the market so if the company becomes more risker than before then investors
would also require more return on investment.

Because, the more debt company has in balance sheet the more risker it becomes due to its
overexposure to debt market and it would also have high costs of financial distress and it is
most likely that company would face major problem during the financial distress such as
inability to meet obligations of the debtholders, shareholders, reduced sales would enforce
company to liquidate its short-term assets or acquire short-term debt to finance the working
capital to enable company to continue operations and meet with current liabilities as well.