The cost of bankruptcy:
A) Includes only the direct costs associated with the actual bankruptcy filing.
B) At least partially offsets the benefits of the interest tax shield.
C) Is minimal due to the regulated processes that have been established under the Bankruptcy and Insolvency Act.
D) Is not affected by the level of the debt-equity ratio.
E) Ignores all opportunity costs.

Question

Quizplus · Accepted Answer

The cost of bankruptcy includes both direct costs (like legal and administrative fees) and indirect costs (such as lost sales, reduced access to credit, and the overall impact on business operations). These costs can offset the benefits of the interest tax shield, which is the tax saving achieved by financing with debt instead of equity due to interest payments being tax-deductible.

The Cost of Bankruptcy