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CFA Level 2
Corporate Finance

Impact of Debt on Financial Distress

Very Easy Capital Structure Decisions Financial Distress

In the context of corporate finance, companies face various challenges associated with their capital structure. One significant risk that companies must manage is financial distress. Financial distress occurs when a company's cash flows are insufficient to cover its debts, leading to potential bankruptcy or reorganization. A crucial aspect of understanding financial distress is to identify the impact of capital structure on a firm’s financial health.

Which of the following statements best describes the relationship between high levels of debt and financial distress?

Hint

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