The inability of a business to meet its fixed financial obligations, like payment of interest, is known as _____.

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Solution

(a) Long-term risk

(b) Market risk

(c) Long-term risk

(d) Business risk

Answer (b) Financial risk

Explanation: Financial risk is the chance of losing cash on investment or a business venture. Other normal and particular financial risks incorporate operational risk, liquidity risk, and credit risk. Changes in macro-economic factors also change the financial risks for firms and industries according to the market environment.

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Q. 'A business that doesn't grow dies', says Mr. Shah, owner of Shah Marble Ltd. with glorious 36 months of tis grand success having a capital base of Rs. 80 crores. Within a short span of time, the company could generate cash flow which not only covered fixed cash payment obligations but also create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to buy the Italian marbe sold by Shah Marble Ltd. To meet the increasing demand. Mr. Shah decided to expand his business by acquiring a mine. This required an investment of Rs. 120 crores. To seek adivice in this matter, he called his financial advisor Mr. Seth who advised him about the judicious mix of equity (40%) and Debt(60%). Mr.Seth also suggested him to take loan from a financial institution as the cost of raising funds from financial institutions is low. Though this will increase the financial risk but will also raise the return to shareholders. He also apprised him that issue of debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tad deductible expense for computation of tax liability
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