Question: Firms choose to have _________ (higher/lower) leverage ratio when the indirect cost of financial distress is large. Please explain your answer. This is because when

  1. Firms choose to have _________ (higher/lower) leverage ratio when the indirect cost of financial distress is large. Please explain your answer. This is because when the leverage is high, losses will hurt more in case of higher leverage.

  2. Below are four types of indirect costs of financial distress. Choose any two of them and explain how these factors impact the firms capital structure choices.

    • Loss of Customers

    • Loss of Suppliers

    • Cost to Employees

    • Fire Sales of Assets

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