Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
When a firm fails to pay off the debts to its creditors, the creditors file bankruptcy case in court and the court imposes bankruptcy order on the firm. In the process of bankruptcy, either the assets of the firm are sold to pay off the debts or the firm is reorganized. In both the cases of liquidating the assets or reorganizing the firm certain costs like legal, accounting, administrative and other fees are incurred. These amounts are quite high and are paid off out of the assets that the firm holds. This decreases the value of the firm from the perspective of creditors and a shareholders. Creditors won't value the company because bankruptcy filling has already questioned the credibility of the company to pay off the debts. Again, there is a possibility that the company might close if most (or all) of its assets are sold off to pay the debts. When bankruptcy is filed against a company, the share prices of the company falls substantially. When there is no clarity on the future existence of a company shareholders exit the positions in the shares of the company. When the assets are liquidated, the debt of the creditors are paid first, then preferred share holders are paid and then any remaining amount is distributed among common share holders. Thus the firm loses value from shareholders because they lose the value of their investment due to substantial fall in share price and if no amount remains after the paying to the creditors, the shareholders won't get any amount from the liquidation of assets as well.
Explain how a firm loses value during the bankruptcy process from both a creditors and a sharehol...
Which of the following statements is most CORRECT? a. Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws. b. All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management. c. Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot...
Capital Structure and Firm Value a. Show graphically (in Debt-Value space) how firm value is affected by debt when i) there are no corporate taxes, corporate debt is riskless and there are no bankruptcy costs, ii) there are corporate taxes, but corporate debt is riskless and there are no bankruptcy costs, and iii) there are corporate taxes, but corporate debt is risky and there are bankruptcy costs. b. What do each of the scenarios above imply about an optimal capital...
Pick the correct statement from below. Multiple Choice 0 Bankruptcy occurs when total equity is negative. Bankruptcy 0 Bankruptcy is a legal proceeding. 0 Bankruptcy occurs when a company cannot meet its financial obligations. 0 Bankruptcy refers to a loss of value for debt holders. 0 Bankruptcy is an inexpensive means of reorganizing a company. Pick the correct statement from below. Multiple Choice The absolute priority rule determines when a firm must be declared officially bankrupt. C) The absolute priority...
During both DNA replication and PCR the DNA double helix must be unwound. Explain how this is achieved during each process.
explain how a firm is able to deal with both types of costs.
During a constant pressure, nonflow (closed system) process, a gas loses 103 BTUs of heat to the surroundings while it's volume changes from 2.2 ft3 to 0.7 ft3. If the temperature of the gas decreases by 7 oF and the system contains 3.3 lbm of gas, find the absolute pressure of the system in lbf/in2. cV for this gas is 0.229 BTU/lbm-oF. (Hint: For this process, ∆U = mcV∆T even though the process is not carried out at constant volume). State...
1. During both DNA replication and PCR the DNA double helix must be unwound. Explain how this is achieved during each process. 2. A methylguanosine cap and poly A tail are added to what molecule? Why are these processing steps important for the cell?
Explain how debt financing (financial leverage) could improve the value of the firm. Explain why too much financial leverage might hurt the value of the firm.
Ristoni Company is in the process of emerging from a Chapter 11 bankruptcy. It will apply fresh start accounting as of December 31, 2017. The company currently has 40,000 shares of common stock outstanding with a $320,000 par value. As part of the reorganization, the owners will contribute 26,000 shares of this stock back to the company. A retained earnings deficit balance of $471,000 exists at the time of this reorganization. The company has the following asset accounts: Accounts receivable...
Explain the process how a firm minimizes its production cost for a given level of output in the long run with given factor prices r(price of capital) and w(price of labor). Draw relevant diagram(s).