A ﬁrm that is approaching bankruptcy will ﬁnd that
A) Stockholders will try to push the ﬁrm into bankruptcy as rapidly as possible.
B) Bondholders will attempt to push the ﬁrm into bankruptcy to prevent their position from deteriorating.
C) Stockholders will seek to protect the value of the assets of the ﬁrm as much as possible.
D) Direct bankruptcy costs such as ﬁling fees will tend to diminish.
E) Indirect bankruptcy costs such as opportunity costs will tend to decrease.

Question

Quizplus · Accepted Answer

Bondholders have a higher priority claim on the assets of the firm compared to stockholders, so they will try to push the firm into bankruptcy to prevent their position from deteriorating further. Stockholders may also try to protect the value of the assets of the firm, but their claims have lower priority than those of the bondholders. Option A is incorrect as it is not in the interest of stockholders to push the firm rapidly into bankruptcy as they stand to lose their investment. Direct bankruptcy costs (such as legal fees) tend to increase when a firm approaches bankruptcy, so option D is also incorrect. Finally, indirect bankruptcy costs (such as opportunity costs) tend to increase when a firm approaches bankruptcy, as the uncertainty and negative publicity affect the firm's reputation and position in the industry, so option E is incorrect.

A ﬁRm That Is Approaching Bankruptcy Will ﬁNd That