Question

a) List and describe 4 out-of-court settlement alternatives for financially distressed firms.

b) Define private placement and explain the advantages and disadvantages

Answer 1

a]

4 out-of-court settlement alternatives are :

1. Equity infusion - The existing common stockholders, infuse new capital into the company to pay off some of the debt, and to continue operations
2. Replacement lender - The existing creditors are paid off with the funds from a replacement lender, and the replacement lender has the first right on future cash flows
3. Restructuring debt - The repayment terms are modified, and some of the creditors are given common stock in the company in lieu of repayment of debt.
4. Arbitration - An arbitrator is appointed instead of a court to resolve the claims

b]

Private placement is when share are issued to a small number of investors in a private offering. This is different from a public offering, when shares are issued to a large number of investors in the general public.

Advantages :

• Less regulatory requirements than a public offering
• Public disclosure of financial statements is not required

Disadvantages :

• Private placement may result in a lower realized price per share, because private investors bear more risk compared to a public offering, since in a public offering the risk is borne by a much higher number of investors