Homework Answers
Answer-
The manufaturer with heavy processing equipment and with high opearting and high financial leverage shows that the firm is highly capital intensive. In general capital intensive firms have high operating leverage.
As the firm has high operating and high financial leverage shows that the sales may be lower but it has high margins and the lender may tolerate the borrower in anticipation of improving sales in the future which will increase the profits because of high margins.
The one more reason why a lender will tolerate the borrower is due to the heavy processing equipment which is an asset that the borrower have. These equipments can also be pledged as collateral while borrowing which will help the lender in reclaiming the loan in case of bankruptcy.
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