Financial Planner

Answer: B - A firm taking out a loan for investments become introduced to financial risks. Financial risk is the uncertainty introduced through ho a firm finances its investments. If a firm uses common stock only to finance investments, it incurs only business risk. If a firm borrows money to fiancé investments, it must pay fixed financing charges in the form of interest to creditors prior to providing income to the common stockholder. This causes the uncertainty of returns to equity investors to increase. This increase in uncertainty because of fixed-cost financing is called financial risk and causes an increase in the stock’s risk premium.