Financial risk applies to levered ﬁrms but not to unlevered ﬁrms.

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Financial risk is the risk that a firm will not be able to meet its financial obligations, such as paying its debts or making interest payments. Levered firms are firms that have debt, while unlevered firms do not. Debt can increase a firm's financial risk because it increases the firm's fixed costs and makes it more difficult to meet its financial obligations in the event of a downturn in the economy.

Financial Risk Applies to Levered ﬁRms but Not to Unlevered