The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs.
A) flotation
B) direct bankruptcy
C) indirect bankruptcy
D) financial solvency
E) capital structure

Question

Quizplus · Accepted Answer

Indirect bankruptcy costs refer to the costs incurred to avoid a bankruptcy filing by a financially distressed firm. These costs include legal and accounting fees, loss of customers and suppliers, decline in employee productivity and morale, and damage to the firm's reputation. Direct bankruptcy costs, on the other hand, refer to the costs associated with the actual bankruptcy process, such as attorney fees, court fees, and administrative expenses. Flotation costs are expenses incurred by a company when it issues new securities, such as underwriting fees and registration fees. Financial solvency and capital structure refer to broader concepts related to a company's financial health and financing decisions, and are not specific to bankruptcy costs.

The Costs of Avoiding a Bankruptcy Filing by a Financially