Question

As a firm's financial position declines and the possibility of bankruptcy increases, the firm will lose customers and employees. These are examples of:

		Costs of financial distress.
		Business risk.
		Agency costs.
		Moral hazard.

Answer 1

Financial distress is a condition in which a company or Individual cannot generate revenue or income because it is unable to meet or cannot pay its financial obligations.

This is Generally due to high fixed cost , iliquid assets etc.

There may be situation in which the company or the individual would not be able to fulfill its financial obligations as such obligation would be to high to fulfill and in such a case there will be no remedy for such financial distress and the end result would be bankruptcy.

Therefore As a firm's financial position declines and the possibility of bankruptcy increases, the firm will lose its customer's and employees. This is an example of. COST OF FINANCIAL DISTRESS.