Financial risk is the basic risk inherent in the operations of a firm. It can be viewed as the volatility of a firm's EBIT.

Question

Quizplus · Accepted Answer

Financial risk refers to the risk associated with the use of financial leverage by a firm, specifically the potential for increased variability in a firm’s earnings per share (EPS) and return on equity (ROE) due to the presence of fixed financial costs, such as interest on debt. The basic risk inherent in the operations of a firm, related to the volatility of its EBIT, is more accurately termed "business risk."

Financial Risk Is the Basic Risk Inherent in the Operations