One of the factors that determine the present value (PV) of financial distress costs is ________.

Question

BlackTom AI · Accepted Answer

To analyze this question, we start by listing the given answer options and what they imply about the present value (PV) of financial distress costs.
Option A: 'costs of unpaid interest arrears' would contribute to PV only if they were expected to occur with some probability, but on their own they do not capture the likelihood of distress; this focuses more on a specific cost category rather than a probabilistic assessment.
Option B: 'loss of dividend payments' reflects opportunity costs associated with distress, yet again this is a consequence of distress rather than a driver of its PV; without a probabilistic framework, this does not determine PV by itself.
Option C: 'probability of financial distress' directly introduces the likelihood that distress occurs. In PV calculations of distress costs, the expected cost is typically the product of the cost magnitude if distress occurs and the probability that distress occurs, discounted to present value. Therefore, probability is a core driver of the PV.
Option D: 'employee compensation' is a component of operating costs or distress-related costs in some scenarios, but it is not the key determinant of PV for financial distress as a whole; it does not inherently reflect the likelihood of distress occurring, which is crucial for PV.
The reasoning behind selecting like this hinges on the standard finance principle that expected present value of a future cost equals the probability-weighted cost, discounted to present value. Thus, among the options, the factor that determines the PV of financial distress costs is the probability of financial distress, since it scales the anticipated loss to reflect both likelihood and timing.
In sum, option A misplaces emphasis on a specific cash flow without probabilistic weighting, option B misattributes the motion to opportunity costs rather than distress probability, option D identifies a cost component but not the governing probability, and option C aligns with the fundamental concept of expected discounted losses in credit risk and distress modeling.

BUSFIN 4211 SP2025 (5053) Week 12 - Practice Quiz 2

One of the factors that determine the present value (PV) of financial distress costs is ________.

View Explanation

Log in for full answers

Similar Questions

A financially distressed firm incurs financial distress costs…

Bankruptcy risk in a firm is closely linked to:

Firms in industries such as BioTech tend to have ________ distress costs because of a small proportion of tangible assets and volatile cash flows.

__________________ refers to the products, methods, inventions, and standards used for the purpose of producing information.

____________________ is data presented in a meaningful context.

_________________ framework—a model of the components of an information system: computer hardware, software, data, procedures, and people.

_______________________ is the ability to model the components of the system to connect the inputs and outputs among those components.

More Practical Tools for International Students

Exam Browser Assistant

Stylized Writing Assistant

Plagiarism Checker Assistant

Citation Assistant

In-Class Translation Assistant

Class Notes Assistant

Quiz Search Assistant

Past Exam Questions by School

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler