a) Which one of the following statements concerning bankruptcy is correct?

Select one:

1. An indirect cost of bankruptcy is the loss of key employees.

2. Bondholders have a greater incentive than stockholders to keep a firm from filing for bankruptcy.

3. Bankruptcy is sometimes used as a means to increase payroll costs.

4. The assets of a firm tend to increase in value when a firm is in financial distress.

5. The administrative costs incurred in a bankruptcy are considered indirect bankruptcy costs.

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b)

In a world with taxes and financial distress, when a firm is operating with the optimal capital structure:

I. the debt-equity ratio will also be optimal

II. the WACC will be at its minimal points.

III, the ROA will be at its maximum point.

IV. the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

Select one:

1. I and II only

2. I and IV only

3. II and III only

4. I , II and IV only

5. II, III, and IV only

6. I, II, and III only