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Financial risk

Financial Risk results from financial uncertainty.It encompases both the risk of possible insolvency and the added variability in earnings per share that is induced by the use of financial leverage.

According to John J. Hampton,” Financial risk is the chance that an investment will not generate sufficient cash flows either to cover interest payments on money borrowed to finance it or principal repayments on the debt or to provide profits to the firm.”

      According to Besely and Brigham,” Financial risk results from using financial leverage which

exists when a firm uses fixed income securities, such as debt and preferred stock, to raise  capital.”

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