Do you think a corporation must actually declare bankruptcy to incur costs associated with financial distress?...

Do you think a corporation must actually declare bankruptcy to incur costs associated with financial distress? Could rumors of financial problems lead to costs? How would these costs lower firm value? Explain your answers.

Expert Solution

No, firm can also Incur indirect insolvency cost which are related to all such opportunity gain lost and all such gains which has been eroded by the company because of financial distress.

Yes, the rumours of financial problem will mean that the company is not going to get various kinds of borrowing and it will have to face the risk of loss of revenue loss due to risk related to financial distress because of indirect costs associated with the financial distress.

These cost will lower the firm value because the firm will not be getting adequate loans and it will also not be getting adequate investment from the share holders and it will be hampered with various opportunities from the legal authorities so the company will not be having an adequate amount of free run on upside to expand itself because its options will be Limited as there is a rumour related to the insolvency and stakeholders will be sceptical about the survival so it will be lowering the overall value of the company in the market also because market participants will value the company lower

jeff jeffy answered 1 year ago

How can a company incur costs of financial distress without ever going bankrupt. What is the...

How can a company incur costs of financial distress without ever going bankrupt. What is the nature of these costs? Further, why might it make sense for a mature, slow-growth company to have a high debt ratio? How does the M&M Theory of Irrelevance play a role in a company’s decision regarding its capital structure? Is M&M applicable in the real world or is it only relevant in the realm of academia?

If we incorporate Financial Distress or Bankruptcy Costs and also Taxes, then we have altered the...

If we incorporate Financial Distress or Bankruptcy Costs and also Taxes, then we have altered the fundamental assumptions of Modigliani and Miller. Explain the relationship between leverage and capital structure under the new assumptions.

A goal of financial managers is to avoid financial distress and ultimately bankruptcy.

A goal of financial managers is to avoid financial distress and ultimately bankruptcy.What might they do to prevent such ? For instance, are there any ratios that they could monitor that might help in avoiding financial distress?

Explain how a company can incur costs of financial distress without ever going bankrupt. What is...

Explain how a company can incur costs of financial distress without ever going bankrupt. What is the nature of these costs? Further, why might it make sense for a mature, slow-growth company to have a high debt ratio? How does the M&M Theory of Irrelevance play a role in a company’s decision regarding its capital structure? Is M&M applicable in the real world or is it only relevant in the realm of academia?

Many companies file for bankruptcy, but, how many actually survive? What do you think the deciding...

Many companies file for bankruptcy, but, how many actually survive? What do you think the deciding factor in surviving when there is more debt than revenue for a company. Did they intentionally over-leverage their assets?

What other costs of financial distress can you think about, that would need to be managed...

What other costs of financial distress can you think about, that would need to be managed by the distress investor

What is bankruptcy? What are the different types of bankruptcy? Do you think bankruptcy protection is...

What is bankruptcy? What are the different types of bankruptcy? Do you think bankruptcy protection is a good thing or should it be eliminated? Explain

[Costs of Financial Distress] Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is...

[Costs of Financial Distress] Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies’ economists agree that the probability of the continuation of the current expansion is 80% for the next year, the probability of a recession is 20%. If the expansion continues, each firm will generate EBIT of $ 2.4 million. If a recession occurs each firm will generate EBIT of $900,000. Steinberg’s...

Problem 15-6 Costs of Financial Distress Steinberg Corporation and Dietrich Corporation are identical firms except that...

Problem 15-6 Costs of Financial Distress Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies' economists agree that the probability of the continuation of the current expansion is 70 percent for the next year, and the probability of a recession is 30 percent. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $4.0 million. If a recession...

Discussion Topic One: What is bankruptcy? What are the different types of bankruptcy? Do you think...

Discussion Topic One: What is bankruptcy? What are the different types of bankruptcy? Do you think bankruptcy protection is a good thing or should it be eliminated? Explain. Discussion Topic Two: The chapter discusses foreclosure. Do quick internet research and find a case that deals with foreclosure. Provide a brief summary of the facts of the case, and provide the court's analysis. Be sure to provide a reference.

Question