The level of financial risk to which a firm is exposed is dependent upon the firm's:
A) tax rate.
B) debt-equity ratio.
C) return on assets.
D) level of earnings before interest and taxes.
E) operational level of risk.

Question

Quizplus · Accepted Answer

The level of financial risk is closely tied to a firm's debt-equity ratio. The higher the ratio, the greater the financial risk since the firm has a higher level of debt that needs to be serviced. This means that if the firm experiences financial difficulty, it may struggle to meet its debt obligations, potentially leading to bankruptcy or other financial distress. Conversely, a lower debt-equity ratio means that the firm is less reliant on debt financing, reducing its financial risk.

The Level of Financial Risk to Which a Firm Is