Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.

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Answer 1

Textbook Question

Chapter 17, Problem 1CQ

Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.

Expert Solution & Answer

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

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(d) Estimate the value of a share of Cisco common stock using the discounted cash flow (DCF) model as of July 27, 2019 using the following assumptions Assumptions Discount rate (WACC) Common shares outstanding 7.60% 5,029.00 million Net nonoperating obligations (NNO) $(8,747) million NNO is negative, which means that Cisco has net nonoperating investments CSCO ($ millions) DCF Model Reported 2019 Forecast Horizon 2020 Est. 2021 Est. 2022 Est. 2023 Est. Terminal Period Increase in NOA FCFF (NOPAT - Increase in NOA) $ 1241 1303 1368 10673 11207 11767 1437 $ 12354 302 ✓ Present value of horizon FCFF 9918 9679 9445 ✔ 0 × Cum. present value of horizon FCFF $ 0 × Present value of terminal FCFF 0 ☑ Total firm value 0 ☑ NNO -8747 ✓ Firm equity value $ 0 ☑ Shares outstanding (millions) 5029 Stock price per share $ 40.05

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Answer 2

Textbook Question

Chapter 17, Problem 1CQ

Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.

Expert Solution & Answer

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

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Answer 3

Textbook Question

Chapter 17, Problem 1CQ

Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.

Expert Solution & Answer

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

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Answer 4

Textbook Question

Chapter 17, Problem 1CQ

Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.

Expert Solution & Answer

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

Answer 8

Expert Solution & Answer

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

To determine: What are the direct and indirect costs of bankruptcy.

Introduction:

Direct costs: These are price that are completely associated with the production of certain products or services. Examples of direct costs are direct material costs, freight costs, commissions and so on.

Indirect costs: These are the costs that are not directly associated with the production of certain products or services. Examples of indirect costs are administration costs, transportation costs, selling and distribution costs and so on.

Answer 12

Explanation of Solution

The following are the direct and indirect costs of bankruptcy:

Indirect costs:

Impaired capability to perform business: Companies might suffer a loss of sales because of decrease in the confidence of consumers and loss of dependable supplies because of a lack of confidence among the suppliers.

Incentive to take large risks: When handling projects of multiple levels of risks, managers who are performing in the interest stockholders’ have an incentive scheme to undertake high risk oriented projects.

Incentive to under-invest: If a firm is facing bankruptcy, stockholders will be affected if they add equity to any new project, even when the project is having positive net present value. The reason for that is the cash flows will go to the bondholders.

Milking the property: During bankruptcy, bondholders will have the first claim to firm’s assets. At the time bankruptcy, the stockholders will have stronger incentives to vote for enhanced dividends.

Direct costs:

These are potentially legal and administrative expenses. Direct costs are related to the litigation arising from bankruptcy or liquidation. Usually, these costs include expert witness costs, lawyer’s expenses and courtroom expenses.

Answer 13

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Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.

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