Bankruptcy risk in a firm is closely linked to:

Question

BlackTom AI · Accepted Answer

When evaluating bankruptcy risk in a firm, we look at factors that erode financial stability, such as profitability, liquidity, and leverage. 
Option 1 states: 'Insufficient profitability, poor cash flows, and high debt service costs.' This combination directly undermines a firm's ability to meet obligations, because low profits reduce internal funds, poor cash flows limit liquidity, and high debt service drains cash, increasing default risk and the likelihood of bankruptcy. 
Option 2 claims: 'High profitability and low debt levels.' In general, this scenario strengthens financial resilience: profits support reinvestment and cash flows are ample to cover obligations, making bankruptcy risk much lower rather than higher. 
Option 3 suggests: 'High levels of equity financing.' While equity financing can dilute risk by reducing debt burden, simply having high equity levels does not by itself describe bankruptcy risk; it tends to improve solvency metrics and reduce financial distress, so this option does not align with bankruptcy risk drivers. 
Option 4 asserts: 'Consistent and high revenue growth over multiple periods.' Sustained revenue growth can enhance earnings visibility and cash generation; while not guaranteeing no risk, it generally lowers bankruptcy risk rather than signaling it. 
In summary, the first option uniquely emphasizes core drivers of distress—profitability, cash flow, and debt service burden—that heighten bankruptcy risk, whereas the other options describe conditions that mitigate risk or are not direct indicators of imminent failure.

BU.210.650.52.FA24 Practice Quiz II

Bankruptcy risk in a firm is closely linked to:

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