alleryStart learning →What is the financial risk that debt financing brings?
AThat the firm cannot make its scheduled payments
BThat the firm cannot find buyers for its products
CThat the firm cannot recruit enough skilled staff
DThat the firm cannot renew its trading licences
Answer & Solution
Correct answer: A. That the firm cannot make its scheduled payments
1. Financial risk is the chance that the firm will be unable to make scheduled interest and principal payments.
2. A lender can force a borrower that fails to make those payments into bankruptcy.
3. Most loan agreements carry restrictions designed to ensure the borrower operates efficiently, which is the lender guarding against exactly this risk.
4. Trouble selling products or hiring staff is business risk of another kind, and neither arises from the choice to borrow.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.4 Raising Long-Term Financing_
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