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

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Financial risk, also known as leverage risk, arises when a company uses debt to finance its operations, which increases the risk for shareholders as they are responsible for paying back the debt along with interest. If no debt were used, shareholders would not face this extra risk.

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