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and preferred equity. The more debt financing a company uses, the higher its financial leverage.
A high degree of financial leverage means high interest payments, which negatively affect the
company's bottom-line earnings per share.
Financial risk is the risk to the stockholders that is caused by an increase in debt and preferred
equities in a company's capital structure. As a company increases debt and preferred equities,
interest payments increase, reducing EPS. As a result, risk to stockholder return is increased. A
company should keep its optimal capital structure in mind when making financing decisions to
ensure any increases in debt and preferred equity increase the value of the company.