One of the Indirect Costs of Bankruptcy Is the Incentive

question 29

Multiple Choice

One of the indirect costs of bankruptcy is the incentive for managers to take large risks.When following this strategy:

• A)the firm will rank all projects and take the project which results in the highest expected value of the firm.
• B)bondholders expropriate value from stockholders by selecting high risk projects.
• C)stockholders expropriate value from bondholders by selecting high risk projects.
• D)the firm will always take the low risk project.
• E)Both A and B.

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Definitions:

Operating Activities

The day-to-day activities of a business that are directly related to producing and selling its goods or services, which generate most of its cash flows.

Income Activities

Actions or operations that generate revenue or income for a business.

Manufacturing Business

A type of business that produces finished goods from raw materials through a combination of manpower, machines, and chemical processes.

Statement of Stockholders' Equity

A financial document that shows changes in the equity section of the balance sheet over a period, including net income, dividend payments, and issuance or repurchase of stock.