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) Include direct costs such as legal and accounting fees.
D) Tend to increase as the debt-equity ratio decreases.
E) Include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

Question

Quizplus · Accepted Answer

Indirect bankruptcy costs refer to the costs a firm incurs in an attempt to stave off bankruptcy, such as lost sales, suppliers demanding unfavorable payment terms, and the cost of management time spent on avoiding bankruptcy, rather than on productive activities. These costs are not the direct legal and accounting fees associated with the bankruptcy process itself, but rather the broader, more diffuse costs associated with the deterioration of the firm's financial health.

Indirect Bankruptcy Costs