Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used.

Question

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This statement is true. Financial risk is the risk that a company may not be able to meet its financial obligations (such as interest payments on debt) due to its use of debt financing. Stockholders bear this extra risk because if the company does not meet its financial obligations, stockholders may see a decrease in the value of their shares or may not receive dividends. Without debt, the risk to stockholders would be lower, as the company would have less financial obligations to meet.

Financial Risk Refers to the Extra Risk Stockholders Bear as a Result