Industries which are cyclical and heavily oriented toward research tend to have high levels of ________. Industries which are subject to high levels of lawsuits tend to high levels of ________.
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A. B. C. D.B
Cyclical business conditions, high dependence on research and development and higher expected liabilities are all indicative of high business risks. This makes firms more risk-averse to debt.
Industries that are cyclical and heavily oriented toward research tend to have high levels of equity. This is because cyclical industries, such as those in the manufacturing or construction sectors, are more prone to economic fluctuations and may experience periods of high profitability as well as downturns. These industries often require significant investment in research and development (R&D) to remain competitive and innovative. R&D expenses are typically funded through equity financing, which involves raising capital by issuing shares of ownership in the company. Equity financing allows the company to access funds without incurring debt and provides investors with a stake in the company's ownership and potential future profits. The higher levels of equity reflect the reliance on equity financing to support the cyclical and research-oriented nature of these industries.
On the other hand, industries that are subject to high levels of lawsuits tend to have high levels of debt. Industries with a higher risk of lawsuits, such as pharmaceuticals, tobacco, or environmental sectors, may face significant legal liabilities and potential financial settlements. These industries often need to maintain a substantial amount of liquidity and financial resources to cover potential legal costs. To manage these risks, companies may opt for debt financing to ensure they have enough funds to address any legal obligations that may arise. Debt financing involves raising capital by borrowing money from lenders or issuing debt securities. By relying on debt, these industries can maintain cash reserves and preserve their equity for other operational and investment purposes. Therefore, the higher levels of debt reflect the need for financing options that allow these industries to address potential legal challenges.
In summary, the correct answer is:
A. debt; equity
Industries that are cyclical and research-oriented tend to have high levels of equity financing, while industries subject to high levels of lawsuits tend to have high levels of debt financing.