Indirect costs of financial distress:
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) include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.

Question

Quizplus · Accepted Answer

Indirect costs of financial distress include the costs a firm incurs as it tries to avoid bankruptcy, such as lost sales, suppliers demanding more favorable payment terms, and the overall impact on operations. These are not direct costs like legal and accounting fees, which are associated with the process of bankruptcy itself.

Indirect Costs of Financial Distress