Which of the following is correct regarding bankruptcy costs?
A)As a firm approaches bankruptcy, the indirect costs of bankruptcy (e.g., financial distress) will tend to decrease.
B)As a firm approaches bankruptcy, the indirect costs of bankruptcy (e.g., financial distress) will tend to increase.
C)As a firm approaches bankruptcy, the indirect costs of bankruptcy (e.g., financial distress) will tend to remain constant.
D)As a firm approaches bankruptcy, the indirect costs of bankruptcy (e.g., financial distress) will tend to increase in proportion to the sales of the firm, less allowance for doubtful accounts

Question

Quizplus · Accepted Answer

As a firm approaches bankruptcy, the risk and uncertainty of its financial distress increases. This leads to increased indirect costs such as higher borrowing costs, loss of customers, loss of suppliers, and legal fees. Therefore, option B is correct. Options A, C, and D are incorrect as they do not reflect the reality of bankruptcy costs.

Which of the Following Is Correct Regarding Bankruptcy Costs