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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

Which of the following is an indirect cost of financial distress rather than a direct cost?

Losing customers and suppliers because they doubt the firm's survival is an indirect cost of distress. Legal, administrator and advisory fees are direct costs, being out-of-pocket expenses of the restructuring or bankruptcy process. Indirect costs are harder to measure but often larger than direct costs.

  1. ALegal fees paid to bankruptcy lawyers
  2. BFees paid to court-appointed administrators
  3. CLoss of key customers and suppliers who doubt the firm's survivalCorrect
  4. DFees paid to financial advisors in a restructuring

Explanation

Direct costs are out-of-pocket expenses of the bankruptcy or restructuring process, such as legal, administrative and advisory fees. Indirect costs are lost sales, tighter supplier terms, departing employees and forgone investments caused by perceived distress.

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