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 incurred by a firm as it tries to avoid seeking bankruptcy protection. These costs include the expenses associated with trying to restructure debt or negotiate with creditors, as well as the loss of reputation and customer confidence that a firm may experience as a result of financial distress. Choices A, B, and D are incorrect because they do not accurately describe indirect bankruptcy costs. Choice C is also incorrect because it refers to direct bankruptcy costs, which are different from indirect bankruptcy costs.

Indirect Bankruptcy Costs