Question

The risk related to inability to meet fixed financial charges like interest payment and other repayment obligations is known as:

• A. Operating risk
• B. Financial risk
• C. Business risk
• D. None of the above

Hint:

Operating risk is related to the core operational activities of a business.- Business risk refers to the potential for a company to face financial loss due to market factors or operational failures.- Financial risk pertains to a company’s ability to meet its financial obligations, such as debt repayments.

Answer 1

The Correct Option is B

The concept of financial risk pertains to the difficulties a company might encounter in meeting its financial obligations, particularly the payment of interest and the repayment of principal amounts of debts. This type of risk arises from a company's financial structure, specifically its reliance on fixed financial charges such as debt interests or lease payments. The presence of high fixed financial commitments increases the company's risk level should it fail to generate adequate revenue to cover these obligations.

In contrast, other types of risks include:

• Operating risk, which involves the risks associated with the company's core business activities, excluding financing considerations.
• Business risk, which encompasses the overall risk of the firm’s operations and extends beyond just financial obligations, impacting the business through external factors like market demand or competition.
• None of the above: This option is not applicable as 'financial risk' has been correctly identified.

Given this explanation, the correct identification for the risk associated with meeting fixed financial charges is: Financial risk.