Effects of High Financial Leverage on Risk During Distress

Consider a publicly traded company, XYZ Corp, which has been facing declining revenues and increased competition in the market. As a result, they have accumulated a significant amount of debt on their balance sheet. Financial analysts are concerned that if XYZ Corp does not take steps to improve its operations and reduce its financial leverage, it may enter a state of financial distress. In this scenario, it is important to understand the implications of capital structure decisions in the context of financial distress.

Which of the following statements best describes the impact of high financial leverage on XYZ Corp's risk during a period of financial distress?