Question

The answer should have some critical thinking and class concepts (Corporate Financial Management). Do not exceed 750 words. You are allowed to cite websites and have references. Thanks.

Firms sometimes use the threat of bankruptcy filing to force creditors to renegotiate terms or even as a means of reducing labor costs. Whether or not this move is ethical or proper is often debated. What say you? What does the company expect by doing so?

Answer 1

Well, Most of the less performing business often use this bankruptcy filing threat to creditors inorder to either reduce the interest rates of loans or extending there repayment period of any particular loans. This helps the firm to save a certain amount of money on yearly basis which the companies can effectively invest in any paricular part of business which has a growth potential. For example, if Abc ltd is paying an interest of 9% for say $10,00,000 for 10 years, company is in ridiculous condition to survive with the current business so company approch the creditor to reduce the interest rate to 8% (if possible)for the loan and extending the payment period for 15years, which would be very much helpful for the company. However, there are companies who are exploting this without any financial burden which is unethical in my opinion.