Understanding Palo Alto Industries' Debt-to-Equity Ratio

D

The correct answer to this question is D. Palo Alto Industries has a higher debt-to-equity ratio compared to the industry average, which indicates that the company has a greater financial risk than other firms in the industry.

Debt-to-equity ratio is a financial metric that measures the amount of debt a company has compared to its equity or shareholder's funds. It is calculated by dividing the total debt of the company by its total equity. A high debt-to-equity ratio indicates that a company has a significant amount of debt in relation to its equity, which could result in financial instability or higher financial risk.

In this case, Palo Alto Industries has a debt-to-equity ratio of 1.6, which means that the company has 1.6 times more debt than equity. This ratio is higher than the industry average of 1.4, indicating that the company has a greater financial risk than other firms in the industry.

A high debt-to-equity ratio could make it challenging for a company to obtain financing or credit, as creditors may perceive the company as having a higher risk of default. Additionally, a high debt-to-equity ratio could result in a higher cost of capital, as investors may demand higher returns to compensate for the increased risk.

Therefore, option D is the correct answer to this question, as Palo Alto Industries has a greater financial risk than other firms in its industry due to its higher debt-to-equity ratio.