Given realistic estimates of the probability and cost of bankruptcy, the future costs of a possible bankruptcy are borne by:
A)all investors in the ﬁrm.
B)debtholders only because if default occurs interest and principal payments are not made.
C)shareholders because debtholders will pay less for the debt providing less cash for the
Shareholders.
D)management because if the ﬁrm defaults they will lose their jobs.
E)None of the above.

Question

Quizplus · Accepted Answer

Shareholders bear the future costs of a possible bankruptcy because the firm's risk of default affects the price debtholders are willing to pay for the firm's debt, ultimately reducing the value that shareholders can extract from the firm.

Given Realistic Estimates of the Probability and Cost of Bankruptcy