One of the Indirect Costs to Bankruptcy Is the Incentive

question 64

Multiple Choice

One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in:
I.the firm always choosing projects with positive NPVs;
II.stockholders turning down low-risk, low-return but positive NPV projects;
III.the firm declaring and paying high cash dividends

• A)I only
• B)II only
• C)III only
• D)II and III only

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Definitions:

Adjusting Entry

An accounting entry made at the end of a period to assign revenues to the period in which they are earned and expenses to the period in which they occur.

Create Deferral

The process of delaying the recognition of revenue or expenses to a future period to align with the accrual basis of accounting.

Insurance Policy

An insurance policy is a legal contract between an insurer and the insured, outlining the terms, conditions under which the insurer agrees to compensate the insured for specific losses.

Ending Retained Earnings

This is the total amount of net income left over for a company after it has paid out dividends to its shareholders, shown at the end of a financial period.