What is financial risk? How does differ from business risk? How does the use of financial leverage result in increased financial risk?

Financial risk refers to the possibility that a firm will not be able to meet its financial obligations, such as paying interest or repaying principal on debt. It arises from the use of debt financing in the capital structure of a company. When a firm borrows funds to finance its operations, it commits to fixed financial payments regardless of its income levels. If the firm’s income or cash flows fall below expected levels, it may struggle to meet these obligations, thereby increasing the risk of default or financial distress. This exposure to uncertain financial outcomes due to the use of ____ __________ ________ ____ __________.
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