Ch030 - Chapter 30: Financial Distress 30.1 Financial...

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Chapter 30: Financial Distress 30.1 Financial distress is often linked to insolvency. Stock-based insolvency occurs when a firm has a negative net worth. Flow-based insolvency occurs when operating cash flow is insufficient to meet current obligations. 30.2 Financial distress frequently can serve as firm’s “early warning” sign for trouble. Thus, it can be beneficial since it may bring about new organizational forms and new operating strategies. 30.3 Under the absolute priority rule (APR), claims are paid out in full to the extent there are assets. In this case, assets are $5,000, so you should propose the follows. Original Claims Distribution of liquidating value Trade credit 1,000 1,000 Secured notes 1,000 1,000 Senior debenture 3,000 3,000 Junior debenture 1,000 0 Equity 0 0 Total 6,000 5,000 30.4 There are many possible reorganization plans. One that might work here is Assets Original Reorganized Claims Claims Going concern value 15,000 Mortgage bonds 10,000 Senior debenture 10,000 Senior
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Ch030 - Chapter 30: Financial Distress 30.1 Financial...

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