The management is considering adjusting the mix to increase debt in order to take advantage of low-interest rates, but this will increase the ______ risk for the company.

Option 1 -> Marketing risk relates to customer demand, competition, and market positioning, which are not directly affected by changes in debt levels.

Option 2 -> Financial risk increases with higher debt levels as the company takes on more fixed financial obligations (interest payments), increasing the risk of financial distress and earnings volatility.

Option 3 -> Operational risk concerns day-to-day business operations, production processes, and internal systems, which are not directly impacted by capital structure decisions.

Option 4 -> External risk refers to factors outside the company's control like regulatory changes or economic conditions, not specifically related to debt levels.

Hence, Option 2: Financial risk -> When management increases debt in the capital structure to take advantage of low-interest rates, the company assumes more fixed financial obligations through interest payments. This creates higher financial leverage, which magnifies both potential returns and losses to equity holders. The increased debt burden raises the probability of financial distress, reduces financial flexibility, and increases the variability of earnings available to shareholders, all of which constitute higher financial risk -> correct