Indirect bankruptcy costs
A)effectively limit the amount of equity a firm issues.
B)serve as an incentive to increase the financial leverage of a firm.
C)tend to increase as the debt-equity ratio decreases.
D)include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.
E)include the legal and accounting fees incurred during the bankruptcy process.

Question

Quizplus · Accepted Answer

Indirect bankruptcy costs refer to the costs a firm incurs in an effort to stave off bankruptcy, such as management spending time on restructuring rather than on productive activities, or the firm losing credibility with suppliers and customers. These costs are not the direct legal and administrative expenses of the bankruptcy process itself, but rather the broader, often more significant, costs related to the firm's deteriorating financial condition prior to any formal bankruptcy proceedings.

Indirect Bankruptcy Costs