CFA Level I · CFA Level I Exam · Capital Structure
Which of the following is most likely an indirect cost of financial distress?
Loss of customers who doubt the firm will honor warranties is an indirect cost of financial distress, because it is a lost-business opportunity cost. Fees to lawyers and administrators are direct costs of the bankruptcy or restructuring process.
- AFees paid to bankruptcy lawyers
- BLoss of key customers who doubt the firm will honor warrantiesCorrect
- CFees paid to court-appointed administrators
Explanation
Indirect costs are opportunity costs such as lost sales, lost key employees, and weakened supplier relations. Legal and administrator fees are direct costs of bankruptcy or restructuring.
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