Which of the following is characteristic of a firm that is highly leveraged?
A) Its owners will not want to issue more stock for fear of diluting their ownership.
B) Its financial return to stockholders will decrease during recession.
C) It can skip paying dividends to its stockholders without fearing bankruptcy.
D) It can skip paying interest to its creditors without fearing bankruptcy.

Question

Quizplus · Accepted Answer

Highly leveraged firms have a greater proportion of debt to equity, which means they have borrowed more money to finance their operations. During economic downturns, these firms may struggle to make interest and principal payments on their debt, which could result in a decline in financial returns to stockholders. Option A is incorrect because issuing more stock would not dilute ownership if the company is already highly leveraged. Option C is incorrect because skipping dividend payments would not alleviate the financial pressures faced by a highly leveraged firm. Option D is incorrect because failing to make interest payments to creditors could lead to default and bankruptcy.

Which of the Following Is Characteristic of a Firm That