One of the Indirect Costs of Bankruptcy Is the Incentive

question 54

Multiple Choice

One of the indirect costs of bankruptcy is the incentive for managers to take large risks.When following this strategy:

• A)the firm will rank all projects and take the project which results in the highest expected value
• Of the firm.
• B)bondholders expropriate value from shareholders by selecting high risk projects.
• C)shareholders expropriate value from bondholders by selecting high risk projects.
• D)the firm will always take the low risk project.
• E)Both A and B.

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Definitions:

Free-Ride

A situation in which an individual benefits from resources, goods, or services without contributing to the cost.

Private Markets

Markets where transactions occur directly between parties without public exchange involvement, often characterized by less regulation.

Socially Optimal Level

A state of resource allocation where the benefits to society are maximized, considering all externalities.

Excise Tax

A tax levied on specific goods or services, such as alcohol, tobacco, and gasoline, usually to discourage their use or to generate revenue.