Which of the following statements related to financial risk are correct?
I.Financial risk is the risk associated with the use of debt financing.
II.As financial risk increases so too does the cost of equity.
III.Financial risk is wholly dependent upon the financial policy of a firm.
IV.Financial risk is the risk that is inherent in a firm's operations.
A)I and III only
B)II and IV only
C)II and III only
D)I, II, and III only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

I. Financial risk indeed pertains to the risk associated with using debt financing, as it reflects the additional risk placed on a company's shareholders due to the use of debt. II. As financial risk increases, the cost of equity can also increase because equity holders require a higher return to compensate for the increased risk. III. Financial risk is influenced by a firm's financial policy, particularly its decisions regarding capital structure (debt vs. equity financing). IV is incorrect because financial risk is distinct from operational risk, which is the risk inherent in a firm's operations.

Which of the Following Statements Related to Financial Risk Are