The Possibility of Bankruptcy Has a Negative Effect on the Value

question 37

Multiple Choice

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

• A) increased bankruptcy risk 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.

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Definitions:

Excess Capacity

The condition where a business produces less than the maximum amount possible, often leading to inefficiency.

Average Total Cost

The total cost of production divided by the quantity produced, taking into account both fixed and variable costs.

Excess Capacity

The situation where a company is producing less than its full potential output due to lack of demand or other constraints.

Efficient Scale

The level of production at which a firm achieves the lowest average total cost, with economies of scale fully exploited.