What is financial risk, and how does it arise?

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What is financial risk, and how does it arise?

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What is financial risk, and how does it arise?

Explanation & AnswerSolution by a verified expert

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There are uncertainties inherent to the firm's operation and there are also uncertainties inherent to the firm's financing sources.

Explanation

Financial risk increases as the use of debt increases. This is an added uncertainty to the shareholders on top of the firm's business risk.

Verified Answer

Financial risk is the uncertainty associated with using financial leverage or debt. It arises from the use of financing sources that require the firm to pay fixed financing costs.

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