Loss of customers and financial distress
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Which type of firm is more likely to experience a loss of customers in the event of financial distress:
a. Campbell Soup Company or Intuit, Inc. (s maker of accounting software)?
b. Allstate corporation (an insurance company) or Reebok International (a footwear and clothing firm)?
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This solution discusses loss of customers and financial distress.
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Firms with a greater risk of experiencing financial distress will borrow less than firms with a lower risk of financial distress. For example, all other things being equal, the greater the volatility in EBIT, the less a firm should borrow.
The costs of financial distress depend primarily on the firms' assets. In particular, financial distress costs will be determined by how easily ownership of ...
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