Given Realistic Estimates of the Probability and Cost of Bankruptcy

question 49

Multiple Choice

Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:

• A) by all investors in the firm.
• B) debtholders only because if default occurs interest and principal payments are not made.
• C) equity holders because debtholders will pay less providing less cash for the equity holders.
• D) management because if the firm defaults they will lose their jobs.

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Definitions:

Manufacturing Overhead

This consists of all the indirect costs related to manufacturing that cannot be directly traced to specific units produced, such as electricity for the factory or maintenance expenses.

Administrative Costs

Expenses related to the general operations of a business, including salaries of senior executives, office supplies, and utilities.

Direct Material

Raw materials that are directly traceable to the manufacturing of a product and are integral to its production.

Direct Labor

The labor costs directly tied to the production of goods or services.