The present value of the costs of financial distress increases with increases in the debt ratio because the:

Question

Quizplus · Accepted Answer

As the debt ratio increases, the probability of default and/or bankruptcy also increases, leading to higher costs of financial distress. This includes costs such as legal fees, lost sales, and reputational damage. The other options are not directly related to the costs of financial distress.

The Present Value of the Costs of Financial Distress Increases