The probability of bankrupt is higher.
A. for a levered firm than an unlevered firm
B. for an unlevered firm than a levered firm
C. only levered firm
D. only unlevered firm
Answer: Option A
Solution (By Examveda Team)
Bankruptcy risk is directly related to a firm's financial obligations.A levered firm uses debt in its capital structure, which means it has fixed obligations like interest payments and principal repayment.
If the firm fails to meet these obligations, it may face financial distress or even bankruptcy.
On the other hand, an unlevered firm does not use debt and therefore has no mandatory financial commitments towards creditors.
As a result, the probability of bankruptcy is higher in a levered firm compared to an unlevered firm due to the burden of fixed financial obligations.
This Question Belongs to Commerce >> Financial Management
A is right