Quick Look At The Bankruptcy Process

As we have discussed, one of the consequences of using debt is the possibility of financial distress, which can be defined in several ways:

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

17. Financial Leverage and Capital Structure Policy

© The McGraw-Hill Companies, 2002

CHAPTER 17 Financial Leverage and Capital Structure Policy

1. Business failure. This term is usually used to refer to a situation in which a business has terminated with a loss to creditors, but even an all-equity firm can fail.

2. Legal bankruptcy. Firms or creditors bring petitions to a federal court for bankruptcy. Bankruptcy is a legal proceeding for liquidating or reorganizing a business.

3. Technical insolvency. Technical insolvency occurs when a firm is unable to meet its financial obligations.

4. Accounting insolvency. Firms with negative net worth are insolvent on the books. This happens when the total book liabilities exceed the book value of the total assets.

We now very briefly discuss some of the terms and more relevant issues associated with bankruptcy and financial distress.

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