One of the indirect costs of bankruptcy is the effect that a potential bankruptcy has on the firm's decisions.The general result is that:
A)the firm will rank all projects and select the project which results in the highest expected firm value.
B)bondholders expropriate value from stockholders by selecting high-risk projects.
C)stockholders expropriate value from bondholders by selecting high-risk projects.
D)the firm will always select the lowest-risk project available.
E)the firm will select only all-equity financed projects.

Question

Quizplus · Accepted Answer

Stockholders may expropriate value from bondholders by selecting high-risk projects. This is because if the project succeeds, stockholders gain significantly, while if it fails, the losses are largely borne by the bondholders due to their fixed claims on the company's assets.

One of the Indirect Costs of Bankruptcy Is the Effect