Question

Agency problems and the indirect bankruptcy cost are born principally by: a) Bondholders. b)Managers. c)Stockholders d)Bankruptcy Attorney

Answer 1

Answer is option C = stockholders

Agency Problems and the indirect bankruptcy cost are born principally by Stockholders. Reasons are given below :

• Meaning of Agency problem :

Agency problems are termed as a conflict of interest in between parties , where one party is like to act in other party's best interests.

So , agency problems are conflict of interest between company managers and their stockholders .

• Meaning of indirect bankruptcy costs

Bankruptcy costs are the cost , which is incurred during bankruptcy process .

Hence , costs of avoiding the bankruptcy filing , which is incurred by financially distressed company are known as indirect bankruptcy costs .

Meaning and Role of stockholder during bankruptcy Are as follows :

• Stockholders are also known as shareholders of a company.
• He is a person , firm or any other institution who owns at least one share or stock of the company , which is termed as an equity .
• So , they have a big risk in their hands.
• They can earn more money when the company has more profit , but they will lose their money , if the company goes poor.
• Thus , they are last in line , to be repaid if the company poorly fails .
• You know , bankruptcy laws are determining the order of payment.
• At the time of bankruptcy , stockholders of company will stop to receive their dividends.

• So , if you are a shareholder , the trustee will ask you to send back the old stock of you , in exchange for new shares from the reorganised company .

• The new shares are only in fewer in number and it may sometimes worthless than your old shares.

• The firm's plan will spell out your rights as an investor of that firm , and also what you can expect to receive from that firm.

• Bankruptcy court may sometimes determining that , stockholders do not get anything , because of that , the debtor is insolvent .

• If the company assets are less , than its liabilities , your stock is worthless .

• So , we can say that , agency problems and indirect bankruptcy costs are born principally by stockholders of the company .

Meaning and Role of Bondholders during bankruptcy are as follows :

• A bondholder is one , who is an investor or owner of the debt securities , which are issued by govt. Or corporations .
• Bondholders will lend money to the bond issuers .
• And , it results , bond investors to receive their principal initial amount of investment back when bonds reached its maturity period .
• They have greater potential for recovering losses than shareholders. Its because of that , the bonds are the debt and company must be agreed to pay its interest and also to return their principal amount .
• At the time of bankruptcy , bondholders will stop to receive interest and principal amounts .
• Thus , if you holds debt securities , you may receive new stock in exchange for your bonds, or new bonds , or combining stock plus bonds .
• They will not affected by agency problems and others , as stockholders .

Role of Bankruptcy Attorney are as follows :

• Bankrupty attorney is one , who counsel you , during bankruptcy process and tells whether its good for you or not.
• They help to take a criticcal look at your debts and assets .and also determine if bankruptcy is the path, that will help you for best .
• At the time of filing process , attorney helps you to prepare required paperwork , mainly focus on your income , expenses , assets and debts .
• After documents are filed , and bankruptcy is in motion , attorney will be your guide in ensuring that you file any needed additional documents and also responds to necessary deadlines on time .

Managers During Bankruptcy are as follows :

• Managers also liable during bankruptcy process .
• But agency problems and indirect cost are born principally by stockholders

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