Question

#6 True or False? Financial risk and business risk are related in that, as business risk increases so do financial risk.

Answer 1

Its is true that increase in business risk, financial risk also increases. The reason behind this is that the businesses with more future earning or cash flows have more financial risk. therefore, business risk increases so do financial risk.

As business risk means that the ability of a company to generate revenue so that it can pay operating expenses where as financial risk means the company's ability to manage financial leverage and company's debt.

If the company cannot generate revenue, its business risk increases and it cannot repay its debt so their financial risk also increase.

Therefore, with increase in business risk, financial risk also increases.