It refers to a position when a company is unable to meet its fixed financial charges namely interest payment, preference dividend and repayment obligations.
Name the concept highlighted in the above lines:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Financial Risk
Option (1) Financial Management — Incorrect. It is the management of the three decisions of investment, financing and dividend. It is not a position of default.
Option (2) Financial Planning — Incorrect. It is the preparation of a blueprint of future financial operations, to make sure funds are available at the right time.
Option (3) Financial Risk — Correct. The risk of default on the payment of fixed charges such as interest, preference dividend and repayment of loans is known as financial risk. It is the chance that a firm would fail to meet its payment obligations.
Option (4) Financial Resources — Incorrect. These are the funds available to the firm. They are not the risk of failing to pay fixed charges.
NCERT (2026-27 Edition): “Financing Decision … The risk of default on payment is known as financial risk which has to be considered by a firm likely to have insufficient shareholders to make these fixed payments. …” “Cutting Back on Debt … Debt is cheaper but is more risky for a business because the payment of interest and the return of principal is obligatory for the business. Any default in meeting these commitments may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered riskless for the business. Higher use of debt increases the fixed financial charges of a business. As a result, increased use of debt increases the financial risk of a company.” “Financial risk is the chance that a firm would fail to meet its payment obligations.” |
Note: The same/similar question has been asked in different years by NTA as per the details given below:
| 2026 | 2025 | 2024 | 2023 | 2022 |
| – | – | – | 16-06 S3 | 17-08 S1 |