The reason that financial leverage increases shareholder risk is that there is:

Question

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Financial leverage involves the use of debt financing, which increases the financial risk for shareholders because they have less equity to absorb any operating losses or negative financial outcomes. This means that any difficulties that the company may face will impact the shareholder value more significantly because the company must service the debt, and less equity is available to cover losses.

The Reason That Financial Leverage Increases Shareholder Risk Is That