Costs of financial distress are greater when a firm increases its:
A) intangible assets as a percentage of total assets.
B) tangible assets as a percentage of total assets.
C) net working capital.
D) retained earnings.

Question

Quizplus · Accepted Answer

The costs of financial distress arise when a firm is unable to meet its financial obligations, leading to bankruptcy or financial reorganization. Intangible assets such as patents, copyrights, and trademarks tend to have low liquidation value and are difficult to sell, thus increasing the costs of financial distress. Tangible assets, on the other hand, can be easily sold or liquidated in case of financial distress. Net working capital and retained earnings do not have a direct impact on the costs of financial distress.

Costs of Financial Distress Are Greater When a Firm Increases