Financial risk
A) refers to the effect that a firm's financing decisions have on the riskiness of the cash flows that the stockholders will receive.
B) increases a firm's business risk.
C) decreases a firm's business risk.
D) is related to how debt affects the business decisions of a firm.

Question

Quizplus · Accepted Answer

Financial risk refers to the risk associated with a firm's financing decisions, including the use of debt or other forms of leverage that may affect the riskiness of the cash flows that stockholders will receive. This is distinct from business risk, which is related to external factors affecting a firm's ability to generate profits. By using leverage, a firm may increase the potential returns for stockholders, but also increases the risk of not being able to meet debt obligations if cash flows fall short.

Financial Risk