There's this line in a CFA Level 2 curriculum about PE leverage "One would also expect that the financial leverage of a firm would be set at a level where BANKRUPTCY COSTS do not outweigh these tax benefits (tax deductibility of debt)".Could someone describe what exactly it means to have costs associated specifically with bankruptcy?
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Direct costs associated with restructuring fees from lawyers and banks, things like fire sales are generally at a discount/loss, etc etc.
And then indirect costs with loss of business, customer confidence, supplier relationships, etc. Generally indirect costs are hard to weigh but are usually higher than direct ones.
This is just from a Corp fin class I took in which professor tries to follow cfa material as best as possible, hope this helps.
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