ABM Corporation’s capital structure consist of 60% equity financing and 40% debt financing. What risk is associated with the given scenario?*Market RiskInterest Rate RiskPurchasing Power RiskBusiness RiskFinancial RiskDefault RiskManagement RiskLiquidity Risk
Question
ABM Corporation’s capital structure consist of 60% equity financing and 40% debt financing. What risk is associated with the given scenario?*Market RiskInterest Rate RiskPurchasing Power RiskBusiness RiskFinancial RiskDefault RiskManagement RiskLiquidity Risk
Solution
The capital structure of ABM Corporation, which consists of 60% equity financing and 40% debt financing, is associated with several types of risk:
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Interest Rate Risk: This is the risk that the cost of borrowing may increase due to changes in market interest rates. Since 40% of ABM's capital structure is debt financing, the company is exposed to this risk.
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Financial Risk: This is the risk associated with the company's ability to meet its financial obligations. Both equity and debt financing contribute to financial risk. In this case, the company has a significant proportion of debt, which must be repaid regardless of
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