Question

Bankruptcy Cost -

(A) According to Yahoo! Finance, OncoGenex is a biopharmaceutical company that engages in the development and commercialization of new cancer therapies that address treatment resistance in cancer patients. What would you guess the debt-to-equity ratio is? Why?

(B) Churches can usually use some debt financing; so can colleges and syhphony orchestras, however, the local homeless shelter usually cannot use debt to expand its operations. Why not?

Answer 1

1) OncoGenex is a company that is engaged in development of new therapies These therapies may or may not be very much successful and if this is in initial stages of development debt financing will be less and company will look after for equity funding hence D/E will be low because denominator will be high as compared to numerator.

2) Local homeless shelter do not have any asset to back the debt raised in case of bankruptcy therefore they can't use debt financing .