Debt financing does not affect the operating risk but it does add financial risk.For example,when there is only half the equity to absorb the same amount of operating risk,risk per share must double.

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Debt financing increases financial risk because it introduces fixed obligations (interest payments), which can strain a company's cash flow, especially if operating income is volatile. This does not change the inherent operating risk of the business but increases the risk to equity holders as there is less equity to absorb fluctuations in operating income.

Debt Financing Does Not Affect the Operating Risk but It