Series 79 practice questionhardAdvanced Financial Analysis
A highly leveraged acquisition increases the target’s pro forma debt/EBITDA from 2.5x to 6.0x. What is the biggest long-term risk associated with this capital structure change?
- AReduced gross profit margin
- BLower working capital
- CHigher asset turnover
- DIncreased default risk and reduced financial flexibility✓ Correct answer
Explanation
Why D — Increased default risk and reduced financial flexibility
A substantial increase in leverage raises default risk and limits flexibility to respond to downturns. Focusing on margin or turnover metrics misses the central issue of debt service capability and potential bankruptcy risk.
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