Which one of the following statements concerning bankruptcy is correct?
A)Bondholders have a greater incentive than stockholders to keep a firm from filing for bankruptcy.
B)An indirect cost of bankruptcy is the loss of key employees.
C)Bankruptcy is sometimes used as a means to increase payroll costs.
D)The assets of a firm tend to increase in value when a firm is in financial distress.
E)The administrative costs incurred in a bankruptcy are considered indirect bankruptcy costs.

Question

Quizplus · Accepted Answer

An indirect cost of bankruptcy is the loss of key employees. This occurs as employees may lose confidence in the firm's stability and may see little future in staying with the company. This can lead to a reduction in morale and productivity. Choice A is incorrect as bondholders do not have a direct interest in the company's survival, unlike stockholders. Choice C is incorrect as bankruptcy is often used as a means to reduce payroll costs. Choice D is incorrect as the assets of a firm tend to decrease in value when a firm is in financial distress. Choice E is incorrect as administrative costs incurred in a bankruptcy are considered direct bankruptcy costs.

Which One of the Following Statements Concerning Bankruptcy Is Correct