What is the difference between 'business risk' and 'financial risk'? What is meant by financial leverage?

Expert Solution

Business risk refers to the possibility that a business may not be able to cover its operational expenses with the amount of revenues that it generates through its business. This may be due to deteriorating business conditions such as change in consumer preferences and demands.

Financial risk on the other hand refers to the possibility of loss due to the company’s inability to manage its debt and leverage.

Financial leverage refers to the use of debt in the company’s capital structure. This is the substitution of borrowed funds for the owners funds which results in reduction in the cost of capital of the firm.

jeff jeffy answered 2 years ago

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