What is Financial risk? How does it arise?

It refers to the risk of the company not being able to cover its fixed financial cost. Fixed financial cost includes payment of interest that is to be paid irrespective of profit.

The higher level of risk are attached to higher degrees of financial leverage. If EBIT(Earnings before interest and tax) decreases, financial risk increases as the firm is not in a position to pay its interest obligations. Thus the risk of default is called Financial risk. The firm should overcome the situation accordingly or will be forced towards liquidation.

Sanisha Maharjan
Jan 16, 2022
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