Inability of the firm to meet its obligations results in financial distress which may lead to…
The direct costs of financial distress and bankruptcy are tangible out-of-pocket or value-realization losses directly triggered by insolvency proceedings, namely (1)…
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Inability of the firm to meet its obligations results in financial distress which may lead to bankruptcy resulting into the following :
1. Distress sale of assets at lower price.
2. Legal and administrative costs for bankruptcy.
3. Dilution of stakeholders’ commitment to the firm.
4. Stretching of payments to suppliers and creditors. The direct costs of such financial distress may be
Answer and explanation
Correct answer C
The direct costs of financial distress and bankruptcy are tangible out-of-pocket or value-realization losses directly triggered by insolvency proceedings, namely (1) distress sale of assets at fire-sale prices below economic value and (2) legal, accounting, and administrative costs of bankruptcy. Items 3 and 4 represent indirect costs or symptoms of distress. Thus, '1 and 2' is correct.
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UGC NET Commerce