Default Risk And Leverage

This problem tests whether a candidate understands that headline leverage metrics do not tell the full story about credit risk. In investment banking interviews, you are often expected to recognize that cash on the balance sheet can materially reduce default risk because it provides a source of repayment if business conditions weaken. The key reasoning is to think beyond gross debt and consider net debt, then connect that to bankruptcy risk and borrowing costs. Interviewers ask this kind of question to see if you can interpret valuation and credit metrics in context, rather than relying on a single ratio in isolation.