Gearing and Capital structure MCQ question BPP exam kit

Dear Mr Moffat,

Could you please help with below question? I did not understand the answer provided by the book.

Who suffers financial risk as financial gearing increases, and why?

A. Lenders because they are less likely to be repaid
B. Lenders because there are fewer assets to offer as security
C. Shareholders as their returns are lower.
D. Shareholders as their dividends become more variable

Answer D

Book explanation.

Statement A and B are incorrect. They may be true but are not definitions of financial risk

Statement C is incorrect: Overall dividends may be lower as gearing increases compared to an equivalent ungeared firm, but there are fewer shareholders-share in the geared equivalent,meaning dividend per share could be higher, lower or the same as the ungeared firm.

It is clear enough as explanation.

Statement D: is correct. As interest payment do not vary with profits, interest is effectively a fixed cost to the business (clear for me ). High financial gearing means that a company is more vulnerable to poor trading conditions (could you please explain what it means?)
For example, reduction in revenue result in relatively large reductions in profits and dividends, as there are less variable costs to cushion the reduction in revenue (what does it mean?)The opposite is the case with increases in revenue, thus shareholders in a geared firm face higher variability in their return.

I read statement D several times, but I could not understand the meaning and the relation with the financial risk.

Sorry for the long typing.

Best Regards

Gabriella