Firms in industries such as BioTech tend to have ________ distress costs because of a small proportion of tangible assets and volatile cash flows.

Question

BlackTom AI · Accepted Answer

When evaluating distress costs across industries, it's important to match the reasoning to asset structure and cash-flow characteristics.
Option 1: high — In biotech and similar sectors, firms often rely on intangible assets and have volatile or uncertain cash flows; this combination typically increases distress costs because lenders view higher risk when tangible collateral is scarce and cash inflows are unpredictable.
Option 2: low — This would be an unlikely characterization for biotech firms, since the lack of substantial tangible assets and volatile cash flows generally raises, not lowers, distress costs, due to higher information and liquidity risk.
Option 3: unexpected — While distress costs can be hard to forecast, the standard view for biotech-like industries is not that distress costs are simply unexpected; they are systematically elevated by asset structure and cash-flow volatility, making this option misleading.
Option 4: varying — Although distress costs can vary across firms, the question points to a tendency in biotech where distress costs are typically high due to structural risk factors; saying they are merely varying misses the stronger, more general pattern that they tend to be high.
Overall, the reasoning aligns with the idea that limited tangible assets and volatile cash flows increase lenders' perceived risk, elevating distress costs across firms in biotech-like industries.

BUSFIN 4211 SP2025 (5053) Week 12 - Practice Quiz 2

Firms in industries such as BioTech tend to have ________ distress costs because of a small proportion of tangible assets and volatile cash flows.

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