Which of the following is NOT true about bankruptcy and its costs?
A) As the debt/equity ratio falls, the probability that a ﬁrm will be able to meet the promised payments on bonds decreases.
B) If a ﬁrm is economically bankrupt, then an ensuing legal bankruptcy will likely result in the bondholders receiving less than what they are owed.
C) The amount of debt a ﬁrm can raise decreases as the probability of bankruptcy increases.
D) A ﬁrm is economically bankrupt when the value of its assets is less than the value of its debt.
E) Direct bankruptcy costs are a disincentive to debt ﬁnancing.

Question

Quizplus · Accepted Answer

This statement is not related to bankruptcy costs, but rather discusses the relationship between debt/equity ratio and the probability of a firm meeting bond payments.

Which of the Following Is NOT True About Bankruptcy and Its