Which of the following is the best deﬁnition of direct bankruptcy costs?
A) The costs that are directly associated with bankruptcy, such as legal and administrative expenses.
B) The cost of capital of a ﬁrm that has no debt.
C) Theory that a ﬁrm borrows up to the point where the tax beneﬁt from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of ﬁnancial
Distress.
D) The equity risk that comes from the nature of the ﬁrm's operating activities.
E) The tax saving attained by a ﬁrm from interest expense.

Question

Quizplus · Accepted Answer

Direct bankruptcy costs refer to expenses that are specifically linked to the process of filing for bankruptcy, such as legal and administrative fees. This is distinct from indirect bankruptcy costs, which include the loss of value to a firm's assets and the potential harm to its reputation.

Which of the Following Is the Best Deﬁnition of Direct