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Bankruptcy is the process by which an entity can get a fresh start by canceling or significantly restructuring its existing debt through the order of a judicial body. Business failures can lead to bankruptcy for various reasons. Consider the following case: The Mitata Companys board of directors replaced the companys chief executive officer and the chief finance officer for the third time in the past five years because of inefficient performance. The company hasbeen having operational issues. The company recently announced that it will be filing for bankruptcy. Based only on the information given in the case, what is the most likely cause of Mitatas failure? O Too much debt O Unexpected increases in interest rates weak management O Price wars with competition Suppose you are a part of the senior management of a company that is in financial distress. Which of the following issues would you focus on addressing immediately? Check all that apply. Estimate the value of business operations, and compare it with the value of the assets if the business were liquidated Identify strategies for the modified distribution policy for the following year. Identify whether the firms long-run assets have suffered economic losses; if they have, then identify who should bear the losses. Identify whether the debt obligations are more than the asset values or whether it is a temporary cash flow problem because the firm cannot make its debt payments. Identify different strategies to increase revenues in the long run that will help service long-term debt.

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Answer #1

Being a part of the senior management of a company which is in financial distress:

Actions to be taken are

  • Estimate the value of business operations, and compare it with the value of assets of the business were liquidated.
  • Identify whether the debt obligations are more than the asset values or whether it is a temporary cash flow problem because the firm cannot make its debt payments

Other actions are effective for focusing on longer term and are not immediate actions.

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