Financial Risk

                 What is so important about Financial Risk? How a business firm capitalizes their business can affect the risk of investors. This is called Financial Risk. The greater amount of leverage (borrowing) used to finance a firm, the greater the financial risk. Leverage can increase possible profits but it also increases the cost of doing business by creating an interest expense that has to be paid out of the company’s profits. This can weaken the company’s cash flow and make it very difficult to operate the business efficiently. If the company goes bankrupt then the creditors get paid before the investors (stockholders).

 

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