Given Realistic Estimates of the Probability and Cost of Bankruptcy

question 49

Multiple Choice

Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:

• A) by all investors in the firm.
• B) debtholders only because if default occurs interest and principal payments are not made.
• C) equity holders because debtholders will pay less providing less cash for the equity holders.
• D) management because if the firm defaults they will lose their jobs.

---

Definitions:

Partnership

A legal business structure where two or more individuals share ownership and management responsibilities, as well as the profits and losses.

Fraudulent Actions

Acts intentionally carried out to deceive others, usually for personal or financial gain, which are illegal.

Start-Up Funds

Capital or financial resources allocated or required to start a new business or venture.

Creditors

Entities or individuals to whom money is owed by debtors.