The Possibility of Bankruptcy Has a Negative Effect on the Value

question 31

Multiple Choice

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

• A)increased bankruptcy risk always 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.
• E)None of the above.

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Definitions:

Net Income

The total earnings of a company after subtracting all expenses, including taxes and operating costs, from its total revenues.

Indirect Method

A method used in cash flow statement preparation that starts with net income and adjusts for non-cash transactions to reflect the cash inflows and outflows from operating activities.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from total revenue.

Financing Activities

Transactions and events that relate to how a company finances its operations, including issuing debt, repaying loans, and issuing or buying back stock.