Question

Why are the indirect costs of financial distress likely to be more important than the direct costs of​ bankruptcy? ​(Choose the correct​ response.) A. Many indirect costs may be incurred even if the firm is not yet in financial​ distress, but simply faces a significant possibility that it may occur in the future. B. None of the above​ - both direct and indirects costs are equally important. C. Direct costs and costs to debt​ holders, whereas indirect costs affect both debt holders and shareholders. D. Indirect costs are contractual obligations that must be​ paid, whereas bankrupcty legislations protects companies from being forced to pay the direct costs of bankruptcy.

Answer 1

Indirect cost of financial distress are more important than the direct cost of bankruptcy because there are various indirect costs that may be included if the firm is not in financial distress, but they are simply facing a significant probability that it may have a financial insolvency so the risk of financial insolvency lead to lot of opportunity cost.

All the other options in respect to the indirect cost and direct cost are false.

Correct answer will be option (A)many indirect cost may be incurred if the firm is not yet in financial distress, but simply faces a significant probability that it may occour in future.