Firms with tangible long-term assets and less predictable cash flows, such as auto manufacturers and steel companies, whose sales vary with changes in economic conditions, tend to use
A)a more nearly equal mix of long-term debt and shareholders' equity financing.
B)a greater amount of long-term debt [80%] than shareholders' equity financing [20%].
C)a smaller amount of long-term debt [20%] than shareholders' equity financing [80%].
D)a greater amount of long-term debt [80%] than assets [20%].
E)a greater amount of shareholders' equity [80%] than assets [20%].

Question

Quizplus · Accepted Answer

Firms with tangible long-term assets and less predictable cash flows tend to use a more nearly equal mix of long-term debt and shareholders' equity financing to balance the benefits of debt (tax shield and lower cost of capital) with the risks of debt (higher bankruptcy risk). This approach allows them to maintain a stable financial structure and ensure access to capital markets in both good and bad economic conditions. Options B, C, D, and E do not reflect the typical financing structure of such firms.

Firms with Tangible Long-Term Assets and Less Predictable Cash Flows