The Possibility of Bankruptcy Has a Negative Effect on the Value

question 37

Multiple Choice

The possibility of bankruptcy has a negative effect on the value of the firm because:

• A) increased bankruptcy risk lowers value.
• B) reorganization is costless but risk is not.
• C) a bankruptcy has real costs associated with it.
• D) value enhancing strategies are no longer available.

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Definitions:

Discharged

In legal terms, released or freed from an obligation, duty, or liability.

Incidental Beneficiary

A third party who may benefit from a contract between two other parties, albeit unintentionally and without the legal right to enforce the contract terms.

Enforce Agreement

The legal process of ensuring that the terms of a contract are carried out as agreed upon by the parties.

Restatement

Secondary legal sources that seek to clarify, explain, and illustrate the principles of a particular field of law to guide the courts in how the law should be applied.