Which of the following is NOT true about bankruptcy and its costs?
A) As the debt/equity ratio falls, the probability that a firm will be able to meet the promised payments on bonds decreases.
B) If a firm is economically bankrupt, then an ensuing legal bankruptcy will likely result in the bondholders receiving less than what they are owed.
C) The amount of debt a firm can raise decreases as the probability of bankruptcy increases.
D) A firm is economically bankrupt when the value of its assets is less than the value of its debt.
E) Direct bankruptcy costs are a disincentive to debt financing.

Question

Quizplus · Accepted Answer

A) is incorrect because as the debt/equity ratio falls, the probability that a firm will be able to meet the promised payments on bonds actually increases, not decreases. Lower leverage means less risk of default.

Which of the Following Is NOT True About Bankruptcy and Its