In addition to the direct costs of bankruptcy, a business may also experience indirect costs like lost clients and suppliers.
The debt has two effects on the company's worth. First, it raises the likelihood of bankruptcy, which entails costs signified by B and lowers the firm's existing worth. The ability to deduct interest payments from taxes provides a tax shield that balances out the costs of bankruptcy.
Bankruptcy expenditures are a typical illustration of a cost of financial trouble. These direct expenses consist of management fees, legal fees, auditor fees, and other charges. Even if bankruptcy is averted, the costs of financial turmoil may still arise (indirect costs).
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