What type of risk does a company face when it uses only common stock to finance its growth?

When a company uses only common stock to finance its growth, it primarily faces business risk. Business risk refers to the inherent uncertainties and potential for loss that a company experiences due to its operational activities. This type of risk is linked to the company's ability to generate profits from its operations, which can be affected by factors such as sales fluctuations, competitive dynamics, management performance, and operational efficiency.

Using common stock as a financing method does not introduce financial risk in the same way that taking on debt would. Financial risk arises when a company has fixed obligations to meet, such as interest and principal payments on debt, which can lead to financial distress if the company’s cash flow becomes insufficient. Since common stock does not come with fixed repayment obligations, the financial risk is minimized.

Market risk and systematic risk are related to broader market movements that can affect all companies, such as economic downturns or changes in interest rates, which are not specific to a company’s operational decisions. Thus, while there may be a consideration of these risks, the direct impact derived from financing solely through common stock aligns with business risk, making it the most relevant to this scenario.