What is the main drawback of not issuing debt so as to avoid bankruptcy costs?Multiple choice question.The firm has to pay higher dividends to the shareholders.The firm has to pay lower dividends to the shareholders.The firm loses the valuable tax shield benefits of debt.The shareholders cannot consult with the bondholders when faced with bankruptcy.

What is one drawback of declaring bankruptcy?A.It distributes a person's debts among many banks.B.It can allow a bank to seize a person's property.C.It often results in a civil lawsuit.D.It forces a person to pay much more than the original loan.

How do bankruptcy costs impact the distribution of firm value between shareholders and bondholders?Multiple choice question.There is less left for shareholders and bondholders.There is no effect on bondholders and shareholders.There is no effect on bondholders but less is available for shareholders.There is more left for shareholders and bondholders.

Select all that applyWhat are some ways in which a bankruptcy filing might hinder a firm's normal business operations?Multiple select question.Customers may not buy, fearing future service problems.The government may increase taxes on future sales.Suppliers may not supply inventory, fearing nonpayment.Banks may place restrictions on the firm's financial activities.

2. Which of the following statements is FALSE?Video: 5.F. P54-72 (Capital structure with other market imperfections 1)Group of answer choicesD) Bankruptcy is rarely simple and straightforward—equity holders don’t just "hand the keys" to debt holders the moment the firm defaults on a debt payment.B) With perfect capital markets, the risk of bankruptcy is not a disadvantage of debt—bankruptcy simply shifts the ownership of the firm from equity holders to debt holders without changing the total value available to all investors.A) When a firm fails to make a required payment to debt holders, it is in bankruptcy.C) Bankruptcy can be a long and complicated process that imposes both direct and indirect costs on the firm and its investors that the assumption of perfect capital markets ignores. PreviousNext

Which of the following are consequences of nonpayment of debt obligations?Multiple select question.Debt obligations will be repaid by the FDIC.A firm may be forced to file for bankruptcy.The firm will encounter some form of financial distress.A firm may be taken over by the local government.