Which of the following is the best definition of direct bankruptcy costs?
A) The costs that are directly associated with bankruptcy, such as legal and administrative expenses.
B) The cost of capital of a firm that has no debt.
C) Theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.
D) The equity risk that comes from the nature of the firm's operating activities.
E) The tax saving attained by a firm from interest expense.

Question

Quizplus · Accepted Answer

Direct bankruptcy costs include legal and administrative expenses directly associated with the bankruptcy process. These costs can significantly reduce the value available to creditors and shareholders in a bankruptcy situation.

Which of the Following Is the Best Definition of Direct