Which one of the following statements concerning bankruptcy is correct?
A)Bondholders have a greater incentive than stockholders to keep a firm from filing for bankruptcy.
B)An indirect cost of bankruptcy is the loss of key employees.
C)Bankruptcy is sometimes used as a means to increase payroll costs.
D)The assets of a firm tend to increase in value when a firm is in financial distress.
E)The administrative costs incurred in a bankruptcy are considered indirect bankruptcy costs.

Question

Quizplus · Accepted Answer

One of the indirect costs of bankruptcy is the loss of key employees who may leave the company during the process. Choice A is incorrect because bondholders have a greater incentive to push a firm toward bankruptcy if they believe that the firm's management is not acting in bondholders' best interests. Choice C is incorrect as bankruptcy is not used to increase payroll costs. Choice D is incorrect as the assets of a financially distressed firm are likely to decrease in value. Choice E is incorrect as administrative costs incurred in a bankruptcy are considered direct bankruptcy costs.

Which One of the Following Statements Concerning Bankruptcy Is Correct