Question

Firms with volatile operating income tend to have lower debt ratios because Blank______. Multiple choice question. there is a lower probability of experiencing financial distress there is a higher probability of experiencing financial distress the need for external financing is higher the need for external financing is lower

Answer 1

Option 2 is correct - There is a higher probability of experiencing Financial distress.

Firms with volatile operating income tend to have lower debt ratios because there is a higher probability of experiencing financial distress.

Financial distress is a condition in which a company or individual cannot generate sufficient revenues or income, making it unable to meet or pay its financial obligations. This is generally due to high fixed costs, a large degree of illiquid assets, or revenues sensitive to economic downturns.

Following reasons can lead to financial distress in a firm.

• Cash flows - The first sign that things are going wrong is a constant shortage of cash. The old adage that cash is king exists for a reason
• Falling margins and poor profits - Experienced entrepreneurs have learnt that for long-term survival what matters are profits, not only sales. Poor profits are usually the first indicators that a business is not doing well.
• Poor sales growth or decline in revenues - When there is no sales growth despite extreme marketing activities, this could indicate a lack of customer acceptance, which is key to any business success.
• Extended payment days - Another sign of possible trouble is a rise in either creditor or debtor payment days. If business has to delay payments to its creditors, this can force some suppliers to stop supplying

• Difficulty in raising capital - If a company is constantly borrowing and asking its investors to inject more capital, this is an underlying sign that it is increasingly finding it difficult to self-sustain.

Hence, Firms with volatile operating income tend to have lower debt ratios because there is a higher probability of experiencing financial distress.

To know more about related topics, check the following

brainly.com/question/23694184

brainly.com/question/15314133

#SPJ4