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:

Consolidated Net Income

The total net income of a parent company and its subsidiaries after eliminating intercompany transactions.

Gain Recognized

The process of recording in financial statements the profit earned from the sale or exchange of an asset, reflecting an increase in economic benefits.