A position when a company is unable to meet its fixed financial charges like interest payment, dividend on preference shares and repayment obligations is referred to as ______ .
A position when a company is unable to meet its fixed financial charges like interest payment, dividend on preference shares and repayment obligations is referred to as ______ .
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- Trading on equity
- Financial risk
- Business risk
- Operating risk
The Correct Option is B
Solution and Explanation
The question describes a company that cannot pay interest, preference dividend or loan repayment when they fall due.
These payments are called fixed financial charges. They must be paid whether the company earns a profit or not.
So we need the term for the risk of failing to meet these charges.
Step 2: Define the correct term:
Financial risk is the risk that a company may not be able to cover its fixed financial charges.
It rises when the company uses more debt, because interest and repayment are fixed obligations.
This matches the position described in the question, so option (B) Financial risk is correct.
Step 3: Check option (A) Trading on equity:
Trading on equity means using borrowed funds at a fixed cost to raise the earnings of equity shareholders.
It is a practice, not a position of failure to pay charges. So (A) is wrong.
Step 4: Check options (C) and (D):
(C) Business risk is the variation in operating income (EBIT) caused by sales, costs and market conditions. It has nothing to do with debt payments.
(D) Operating risk is another name for the same operating side risk linked to fixed operating costs.
Neither is about meeting interest or repayment, so both are wrong.
Final Answer:
The inability to meet fixed financial charges is financial risk, option (B).
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