What is the impact of increased leverage on a company's risk?

Increased leverage refers to the use of borrowed funds to finance a company's operations or investments. While leverage can amplify returns on equity during profitable times, it also introduces additional risk to the company's financial stability. When a company increases its leverage, it takes on more debt, which must be repaid regardless of the company's performance. This obligation can reduce financial flexibility, as the company may have less ability to respond to market changes, invest in new opportunities, or weather downturns without compromising its financial health.

The increase in debt means that the company's cash flows are more heavily committed to interest and principal repayments, thus limiting the resources available for other operational needs. Hence, financial flexibility is diminished, making it challenging to adapt to adverse conditions or seize growth opportunities when they arise.

In context, while other options suggest various benefits such as increasing equity returns or stabilizing cash flow, they do not directly relate to the inherent risks introduced by leverage. Increased operational costs and reduced financial flexibility are more accurately aligned with the implications of leveraging financial resources.