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 associated with the filing and indirect costs such as lost reputation and reduced access to credit in the future. Bankruptcy can also partially offset the benefits of the interest tax shield by limiting the amount of debt that can be deducted for tax purposes. While there are regulated processes established under the Bankruptcy and Insolvency Act, these may not prevent all costs associated with bankruptcy. The level of the debt-equity ratio can also impact the cost of bankruptcy, as higher levels of debt may lead to increased bankruptcy costs. Finally, the cost of bankruptcy should be considered in terms of opportunity costs, such as lost potential future earnings and business opportunities.

The Cost of Bankruptcy