Royal Beds Inc

Multiple Choice

Royal Beds Inc. is a company that sells mattresses and wooden beds. Its capital structure indicates that it a highly leveraged company. Which of the following scenarios would Royal Beds have to encounter in case it was hit by a financial crisis like recession?

A) Recession would bring about a relief in the payment of the principal amount and interest on the debts.
B) It would desperately be looking for ways to replace most of its debt with equity.
C) It would be hit by the realization that the use of leverage can never decrease its return on equity.
D) Recession would increase the retained earnings of the firm. As the recession of 2007­2008 loomed over both large and small businesses,