One of the Indirect Costs to Bankruptcy Is the Incentive

question 20

Multiple Choice

One of the indirect costs to bankruptcy is the incentive toward underinvestment.Following this strategy may result in:

• A)the firm always choosing projects with the positive NPVs.
• B)the firm turning down positive NPV projects that it would clearly accept in an all equity firm.
• C)stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
• D)Both A and C.
• E)Both B and C.

---

Definitions:

Vertical Analysis

Vertical Analysis is a financial statement analysis tool that presents each item in the financial statement as a percentage of a base figure for the same period, facilitating ratio comparisons.

Horizontal Analysis

Horizontal analysis is a financial analysis method that compares historical financial data across different periods to identify trends and growth patterns.

Common-sized Statement

Financial reports displaying every item as a proportion of a base figure, making it easier to compare between different times or businesses.

Financial Analysis

The evaluation of a business, project, budget, or other finance-related entity to determine its performance, stability, and profitability.