Firms That Have High Leverage Ratios Have a Lower Probability

question 52

True/False

Firms that have high leverage ratios have a lower probability of experiencing financial distress because they have a known fixed- interest expense to pay regardless of market conditions.

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Definitions:

Original Investment

The initial amount of money put into an investment or project, serving as the baseline for measuring future earnings or losses.

Nominal Interest Rate

The interest rate before adjustments for inflation, as opposed to the real interest rate.

Periodic Interest Rate

The interest rate applied to a loan or investment for a specific period, usually shorter than a year.

Compound-Interest GIC

A Compound-Interest Guaranteed Investment Certificate is a type of investment where the interest earned is reinvested, allowing the initial investment to grow at an exponential rate over time due to the compound interest effect.