Question

1. The following is not an example of a direct cost of bankruptcy:

a. Accountant Fees

b. Poor terms from suppliers

c. Court Fees d. Lawyer Fees

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2. The following theory of capital structure predicts that firms with high profitability issue less debt:

a. Debt burden

b. Pecking order

c. Distress Cost

d. Static trade-off

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3. The following is an example of an industry with a low amount of debt:

a. Air Transport

b. Hotels and motels

c. Building Construction

d. Biological products

Answer 1

Question 1

Solution: Option C. is the correct answer. Since direct cost of bankruptcy includes the cost of hiring the professionals. Thus, Court Fees doesn't include in it.

Question 2.

solution: Option C. is the correct answer. Because more profitable firms or companies borrow least and this is explained by the Pecking order theory. This theory shows the inverse relationship between profitability and debt ratios.