Which one of the following statements concerning bankruptcy is correct?

A) A firm is considered bankrupt when it becomes delinquent on a loan payment.
B) The administrative expenses of a bankruptcy are classified as indirect bankruptcy costs.
C) Bankruptcy costs may offset the tax-related gains from leverage.
D) The higher cost of capital which a firm pays in order to avoid excessive debt is considered a direct cost of bankruptcy.
E) Bankruptcy is a relatively inexpensive process.

Question

Shelley Winter · Accepted Answer

Final Answer : C, Explanation :  Bankruptcy costs, including both direct costs (such as legal and administrative fees) and indirect costs (such as loss of customers, suppliers, or employees), can indeed offset the tax benefits that a firm might gain from using debt financing (leverage). This is because the potential for bankruptcy increases the firm's risk, which can lead to higher costs and reduced value.

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