Lower Credit Risk: Factors to Consider

Which of the following firm characteristics will most likely result in lower credit risk?

Firms with large amount of intangible assets.

Firms require high capital expenditure each year

Firms require low capital expenditure each year.

Firms operate in cyclical industry.

Answer:

Firms with low capital expenditure each year are most likely to result in lower credit risk.

When evaluating credit risk, several factors are considered. However, in this scenario, assuming all else is equal, the characteristic that is most likely to result in lower credit risk is firms with low capital expenditure each year.

Low capital expenditure implies that the firm requires less investment in long-term assets and infrastructure. This can indicate lower financial risk as the company's capital needs are lower, reducing the strain on its cash flow and financial stability. With lower capital expenditure, the firm may have more funds available for debt servicing and a reduced likelihood of defaulting on its obligations, making it less risky from a credit perspective.

On the other hand, firms with a large amount of intangible assets may face higher credit risk. While intangible assets can be valuable, they may not be easily liquidated or used as collateral in case of financial distress, making lenders more cautious.

Firms requiring high capital expenditure each year may also pose higher credit risk. High capital expenditure demands significant funding, potentially increasing the firm's debt burden and affecting its ability to meet financial obligations.

Firms operating in cyclical industries may experience fluctuations in revenue and profitability, which can impact their ability to service debt. In summary, among the given characteristics, firms with low capital expenditure each year are more likely to have lower credit risk.