Question

______ refers to a situation when a company is not able to meet its fixed financial charges.

Options

• Financial risk

• Financial struggle

• Both (1) and (2)

• None of the above

Answer 1

Financial risk

Explanation - 

Financial risk occurs when a corporation is unable to meet its set financial obligations, such as interest payments, preferred dividend payments, and repayment obligations. To put it another way, it refers to the likelihood that the corporation will be unable to pay its fixed financial obligations. It occurs when the debt share in the capital structure rises. This is because the corporation is required to pay interest charges on debt in addition to the principle amount. As a result, the greater the debt, the greater the payment requirements, and thus the greater the risk of default. As a result, increased loan usage increases the company's financial risk.