You are evaluating a company and have found a new way to calculate the present value of bankruptcy costs,agency costs of outside equity as well as debt.You find that the agency costs of outside equity is $100 while the agency cost of outside debt is $1,000,000.The costs of bankruptcy are also $1,000,000.What type of firm does most likely describe?

Question

Quizplus · Accepted Answer

The high agency cost of outside debt suggests that the company has taken on too much debt, while the relatively low agency cost of outside equity suggests that equity may be lacking or undervalued. The high cost of bankruptcy also indicates that the company may be at risk of defaulting on its debt obligations. Overall, these factors suggest that the company has taken on too much leverage and is potentially in financial distress.

You Are Evaluating a Company and Have Found a New