Studies have found that firms with large investments in tangible assets tend to have:
A)higher financial distress costs than firms with comparable investments in intangible assets.
B)zero debt.
C)higher target debt-equity ratios than firms that primarily invest in intangible assets.
D)the highest financial distress costs of any firm per dollar of debt.
E)the same capital structure as firms that specialize in intangible asset investments.

Question

Quizplus · Accepted Answer

Firms with large investments in tangible assets tend to have higher target debt-equity ratios than firms that primarily invest in intangible assets because tangible assets provide collateral for debt financing, giving lenders more security and increasing their willingness to lend. This higher debt level can lead to higher financial leverage and therefore higher financial distress costs, but this is outweighed by the benefits of using debt financing to invest in tangible assets.

Studies Have Found That Firms with Large Investments in Tangible