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.

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Definitions:

Perfect Competition

A market structure characterized by a large number of small firms, homogenous products, perfect information, and no barriers to entry or exit, leading to price-taking behavior.

Demand Curves

Graphical representations showing the relationship between the price of a good or service and the quantity of that good or service that consumers are willing and able to purchase at different prices.

Marginal Revenue Curves

Graphical representations that show how marginal revenue varies as output level changes, used by firms to determine the most profitable level of production.

Price Discrimination

A pricing approach where a single provider charges different prices for essentially the same products or services in different markets.