Which of the following statements is correct regarding financial risk?
A)Financial risk refers to the extra risk shareholders bear as a result of using preferred shares as compared with the risk they would bear if new debt were used.
B)Financial risk refers to the reduced risk shareholders bear as a result of using debt as compared with the risk they would bear if no debt were used.
C)Financial risk refers to the extra risk shareholders bear as a result of using accounts payable as compared with the risk they would bear if new long-term debt were issued.
D)Financial risk refers to the extra risk shareholders bear as a result of using debt as compared with the risk they would bear if no debt were used.

Question

Quizplus · Accepted Answer

Financial risk refers to the additional risk that shareholders bear as a result of using debt, compared to not using any debt. This is because debt requires regular interest payments and eventual repayment of principal, which can place a strain on a company's financial resources and impact profitability. Therefore, using debt increases the potential for financial distress or default, leading to higher risk for shareholders. Option D correctly identifies this concept. Option A is incorrect because preferred shares are a form of equity, not debt, and therefore do not entail the same risk as debt financing. Option B is also incorrect because using debt generally increases risk for shareholders, rather than reducing it. Option C is incorrect because accounts payable are a form of short-term liabilities, and therefore do not involve the same level of risk as long-term debt.

Which of the Following Statements Is Correct Regarding Financial Risk