Okay, why are higher amounts of leverage result in greater expected costs of financial distress and a higher probability of financial distress? Is it because the firm is committed to making interest payment to debtholders? Someone please shine the light…
If you are talking only about financial leverage than I think that is correct.
You have a higher probability to file for bankruptcy as your debt increases. If you have zero debt, there is no chance for financial distress via bankruptcy.
Because the more leverage you have the more fixed cost you have- no matter what kind of leverage. having higher costs and variable income/revenue the way most of the business are increases the chance that you default in one way or another
Just financial leverage, so I guess the higher the fixed costs i.e. Interest payments the more risk…okay I get it now!
It doesn’t have to be only financial costs - the issue is thought that fixed operating costs can me reduced to a certain degree versus financial costs - interest that needs to be paid no matter what
This question doesn’t have to do with degree of financial leverage. It is in the context of optimal capital structure i believe.