A company is said to be in a state of financial distress:
A)when its cost of equity capital is too high.
B)when its cost of debt capital is high.
C)when the D/E exceeds 25 per cent.
D)when it incurs problems in meeting its commitments to lenders.

Question

Quizplus · Accepted Answer

Financial distress refers to a situation when a company is unable to meet its financial obligations, especially those towards lenders. This can lead to default on loans, bankruptcy or insolvency. Therefore, option D is the best choice as it directly indicates problems in meeting commitments to lenders which are an important aspect of financial distress. Options A, B, and C are not necessarily indicative of financial distress, as high cost of equity or debt, or a high debt to equity ratio could be a normal part of a company's operations and financial planning.

A Company Is Said to Be in a State of Financial