Question

Which of the following add up to the costs of financial distress? 1. Direct bankruptcy costs, primarily legal and administrative costs. 2. Indirect bankruptcy costs, reflecting the difficulty of managing a company when it is in bankruptcy proceedings. 3. Costs of the threat of bankruptcy, such as poor investment decisions resulting from conflicts of interest between debtholders and stockholders. (A) 1 (B) 2 (C) 3 (D) 1,2 and 3

Answer 1

The correct answer is (D) 1, 2 and 3. Direct bankruptcy costs, indirect bankruptcy costs, and costs of the threat of bankruptcy all contribute to the costs of financial distress.

Step-by-step explanation:

The costs of financial distress include:

1. Direct bankruptcy costs, primarily legal and administrative costs.
2. Indirect bankruptcy costs, reflecting the difficulty of managing a company when it is in bankruptcy proceedings.
3. Costs of the threat of bankruptcy, such as poor investment decisions resulting from conflicts of interest between debtholders and stockholders.

Therefore, the correct answer is (D) 1, 2 and 3.