A firm can become insolvent with a small decrease in its asset value if it has:
A) more assets.
B) a high collateral-to-debt ratio.
C) a high leverage ratio.
D) more equity.

Question

Quizplus · Accepted Answer

A high leverage ratio means that a firm has a higher amount of debt compared to its assets and equity. This makes the firm more vulnerable to insolvency if there is a decrease in its asset value, as the amount of debt remains the same while the value of assets decreases, potentially leading to a situation where the firm cannot meet its debt obligations. Having more assets or equity and a high collateral-to-debt ratio may provide some cushioning, but the leverage ratio remains a significant factor in determining a firm's solvency.

A Firm Can Become Insolvent with a Small Decrease in Its