Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:
A)all investors in the firm.
B)debtholders only because if default occurs interest and principal payments are not made.
C)shareholders because debtholders will pay less for the debt providing less cash for the shareholders.
D)management because if the firm defaults they will lose their jobs.
E)None of the above.

Question

Quizplus · Accepted Answer

Shareholders bear the future costs of a possible bankruptcy because debtholders demand a higher yield to compensate for the risk, reducing the amount shareholders can raise from issuing debt.

Given Realistic Estimates of the Probability and Cost of Bankruptcy