Fixed Income Q140

140ABC Corp. manufactures a commodity product in a highly competitive industry in which no company has significant market share and where there are low barriers to entry. Which of the following best describes ABC’s ability to take on substantial debt?

A
Its ability is very limited because companies in industries with those characteristics generally cannot support high debt loads.
B
Its ability is strong because companies in industries with those characteristics generally have high margins and cash flows that can support significant debt.
C
The information is insufficient to comment on the company’s debt-taking ability.

Option : A
Explanation : Companies in industries with those characteristics typically have low margins and limited cash flow and thus cannot support high debt levels.

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