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True or False: -If bankruptcy costs are only incurred once the firm is in bankruptcy and...

True or False:

-If bankruptcy costs are only incurred once the firm is in bankruptcy and its equity is worthless, then these costs will not affect the initial value of the firm.

-In a perfect market, if a change in leverage raises a firm’s earnings per share, the firm’s value rises.

Which company has higher debt ratio?  Company with risky and intangible assets v.s. with tangible and safe assets.  Company paying heavy taxes v.s. low taxes  Profitable firm v.s. less profitable firm?

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Answer #1

When a firm goes for bankruptcy, the costs that are incurred or expected to be incurred will reduce the present value of the firm. Debt holders recognize financial distress cost and these are borne by them because they will not be realizing full value of assets as a consequence the shareholders will be paying less for the debt.

Therefore the correct answer is False.

Note: For remaining questions, please post it separately to be answered.

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