You work for a large car manufacturer that is currently financially healthy. Your manager feels that the firm should take on more debt because it can thereby reduce the expense of car warranties. To quote your manager, $$If we go bankrupt, we don$$t have to service the warranties. We therefore have lower bankruptcy costs than most corporations, so we should use more debt.$$ Is he right?

a$.$

No$,$ because shareholders will have to pay for the warranties

b$.$

No$,$ because sales will decline for sure.

c$.$

Yes, because the risk of bankruptcy surely reduces the potential costs of warranties, and there are no negative effects of bankruptcy

d$.$

No$,$ because shareholders will have to pay the remaining debts

e$.$

Maybe yes, but not necessarily. The risk of bankruptcy will also reduce the level of trust of potential customers, hence potentially reducing sales. Thereofre, the overall effect depends on what factor prevails: lower costs of warranties, or lower revenues from sales.