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Business and Financial Risk: Capital Structure Analysis

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Please define business risk and financial risk. Explain their importance in capital structure analysis.

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Solution Summary

Solution defines business risk and financial risk, as well as explains their importance in capital structure analysis.

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Definition of financial risk :

Financial risk is the risk of probability of loss inherent in the methods used in financing a firm that may impair its ability to provide adequate return.

Meaning of financial risk:

Therefore, financial risk is the risk associated with any form of financing. Risk is the probability of unfavorable condition. Financial risk is the possibility of loss in investment or speculation. It is the risk that the firm is unable to meet its financial obligations. Usually financial risk is associated with financing of asset by debt. If the debt is more, financial risk is more. Therefore, financial risk is the ...

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