Indirect Bankruptcy Costs

question 42

Multiple Choice

Indirect bankruptcy costs

• A)effectively limit the amount of equity a firm issues.
• B)serve as an incentive to increase the financial leverage of a firm.
• C)tend to increase as the debt-equity ratio decreases.
• D)include the costs incurred by a firm as it tries to avoid seeking bankruptcy protection.
• E)include the legal and accounting fees incurred during the bankruptcy process.

---

Definitions:

Modigliani-Miller Model

A theory on capital structure that suggests a firm's value is unaffected by its financing decisions under certain conditions.

Bankruptcy Costs

Expenses associated with the process of declaring bankruptcy, including legal fees, administrative fees, and any potential loss to creditors.

Market Value

The current price at which an asset or service can be bought or sold in the market, determined by supply and demand dynamics.

EBIT

EBIT stands for Earnings Before Interest and Taxes, a measure of a company's profitability that excludes interest and income tax expenses.