1. What are direct bankruptcy costs? 2. What are indirect bankruptcy costs? 3. What are the...

1. What are direct bankruptcy costs? 2. What are indirect bankruptcy costs? 3. What are the agency costs of equity

Expert Solution

Direct cost of bankruptcy are those cost which are directly related to bankruptcy. This includes legal fees paid, accounting fees, loss thar arise due to selling of assets that is distressed at a lower price. This also includes rise in borrowing rate as bankruptcy leads to fall in credit rating. Further it includes various fee paid to accountant, liquidators, investment bank etc.

Indirect cost of bankruptcy is the cost that includes degradation of images of the firm/person. This includes loss of customer trust, dampening of brand value and tightening of credit term by the supplier. Indirect cost makes the survival really tough for the firm or person.

Agency cost of equity is defined as the cost that is incurred due to conflict of interest between the management and the shareholders and this also occurs due to presence of asymmetrical information between management and shareholders. To reduce this cost there should be a transparency between the two.

jeff jeffy answered 1 year ago

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