What might be a risk of a company being over-leveraged?

Being over-leveraged means that a company has taken on too much debt relative to its equity. This situation poses several significant risks, the most critical being the potential for bankruptcy. When a company is highly leveraged, it has higher fixed financial obligations in the form of interest payments on its debt. If the company faces a downturn in business or experiences reduced cash flow, it may struggle to meet these obligations. If debt obligations cannot be met, it may lead to default, which can ultimately result in bankruptcy.

In contrast, the other options suggest positive outcomes – such as increased market reputation or enhanced competitive advantage – which are not typically associated with over-leverage, as excessive debt usually creates instability and can jeopardize a company's long-term viability. Similarly, while higher profit margins can be appealing, they are not guaranteed when a company is over-leveraged; in fact, high debt levels can reduce profitability due to the significant cost of servicing that debt.

Thus, the risk of bankruptcy stands out as a critical consequence of being over-leveraged, reflecting the fragility that comes with excessive reliance on borrowed funds.