What is the concept of Financial Risk. How is it tied to financial leverage? and As an...

What is the concept of Financial Risk. How is it tied to financial leverage? and As an investor, why should this be important to you?

Expert Solution

Financial risks refer to risks related to the capital structure of the business. This includes risks relating to financial transactions such as loans, interest rate fluctuations and defaults.Financial leverage refers to the amount of money borrowed to fund business operations. This increases the financial risk of the business since it is accompanied with interest risk and default risk. As an investor, it is important because it increases the risk of the investments. Higher the leverage higher will be the risk due to greater dependence on external funds.

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