Final answer:
The example of a direct bankruptcy cost is incurring legal fees for the preparation of bankruptcy filings, and it is vital in the comprehensive understanding of the financial choices a company makes when facing bankruptcy.
Step-by-step explanation:
The example of a direct bankruptcy cost is incurring legal fees for the preparation of bankruptcy filings. This is an expense that arises explicitly as a result of the bankruptcy process and is paid directly by the bankrupt company. These costs are distinct from indirect bankruptcy costs which typically include items such as the lost opportunity for a firm to fund positive net present value projects or the overall impact on business operations such as losing a key customer due to financial instability.
When a firm files for bankruptcy, it may still continue to operate to attempt a reorganization under Chapter 11, rather than liquidating under Chapter 7, as it can allow them to negotiate with creditors to reduce debts and restructure their operations in an effort to become profitable again. The strategic move is preferred as it helps preserve the firm's value, maintain control of the company, and potentially avoids the complete shutdown of its operations.