Firm A financed by 20% debt and 80% equity while firm B is financed by 50% debt and 50% equity which of the two firms has the lowest financial risk and why?

Firm A has lower financial risk compared to Firm B. This is because Firm A has a lower proportion of debt in its capital structure (20% debt) compared to Firm B (50% debt).

Debt is considered a riskier form of financing as it involves fixed interest payments and the potential for default if the company is unable to meet its debt obligations. A higher proportion of debt in a company's capital structure increases its financial risk as it increases the company's leverage and potential for financial distress.

On the other hand, equity financing does not involve fixed payments and does not have the same risk of default as debt. Therefore, a higher proportion of equity in a company's capital structure reduces its financial risk.

In this case, Firm A's lower proportion of debt means it has lower financial risk compared to Firm B, which has a higher proportion of debt.