Final answer:
The direct costs of financial distress mainly include legal fees, loss of asset value, and administrative expenses. These costs are incurred directly due to financial difficulties, unlike indirect costs such as loss of key employees or lost sales which are secondary effects.
Step-by-step explanation:
The direct costs of financial distress are specific expenses and losses that a firm directly incurs as a result of experiencing financial difficulties. Examples of these direct costs include:
- Legal fees: These are costs associated with hiring attorneys and other legal professionals to negotiate settlements, handle bankruptcy proceedings, or manage other legal matters related to financial distress.
- Loss of asset value: When a firm is in distress, it may be forced to sell assets at a lower value than what they could fetch under normal circumstances, leading to a direct loss of asset value.
- Administrative expenses: These are costs related to the administration of a firm's restructuring, such as fees paid to accountants, consultants, and insolvency practitioners.
Other options mentioned such as loss of key employees and lost sales are considered indirect costs of financial distress as they are secondary effects that may arise due to a company's financial troubles but are not direct outlays of cash.