The reason that financial leverage increases shareholder risk is that there is:
A) more debt which increases the operating risk.
B) less equity to absorb the operating risk.
C) less business risk to be spread around.
D) more financial risk due to reduced business risk.

Question

Quizplus · Accepted Answer

Financial leverage involves using debt to finance a company's operations. This increases the risk for shareholders because they have less equity to absorb any potential losses. If the company fails to generate enough profits to cover the interest payments on the debt, it could lead to financial distress and a decline in the value of the shares. The more debt a company has, the more leverage it has, and the greater the risk for shareholders.

The Reason That Financial Leverage Increases Shareholder Risk Is That