Financial risk is associated with business firms that borrow heavily to finance their operations.

Question

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Financial risk refers to the possibility of financial loss. When business firms borrow heavily to finance their operations, they increase their financial leverage, which in turn increases their financial risk. This is because heavily indebted firms have to make interest and principal payments on their loans, regardless of whether their operations are generating sufficient cash flow to cover these payments. If their operations become unprofitable, they may not be able to make these payments, which could lead to default and bankruptcy.

Financial Risk Is Associated with Business Firms That Borrow Heavily