Lecture Note Eight_Tsing Hua_2009 - Lecture Note 8...

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Corporate Finance Lecture Note 8 1 Lecture Note 8 Financial Distress and Corporate Restructuring
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Corporate Finance Lecture Note 8 2 What is in This Note? Overview of Financial Distress Overview of Liquidation and Reorganization Overview of Corporate Restructuring Reference: Chapter 30 of RWJJ, Chapter 33 of BMA
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Corporate Finance Lecture Note 8 3 Roadmap Be able to define financial distress and understand what happens to a firm in distress Understand the difference between liquidation and reorganization Understand the absolute priority rule Understand the potential benefits of a private workout versus formal bankruptcy
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Corporate Finance Lecture Note 8 4 Definition of Financial Distress
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Corporate Finance Lecture Note 8 5 What Is Financial Distress? Financial distress is a situation where a firm’s operating cash flows are not sufficient to satisfy current obligations, and the firm is forced to take corrective action. Financial distress may lead a firm to default on a contract, and it may involve financial restructuring between the firm, its creditors, and its equity investors.
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Corporate Finance Lecture Note 8 6 Financial Distress Economic Distress
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Corporate Finance Lecture Note 8 7 Insolvency Stock-base insolvency: the value of the firm’s assets is less than the value of the debt. Assets Debt Equity Solvent firm Debt Assets Equity Insolvent firm Debt Note the negative equity
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Corporate Finance Lecture Note 8 8 Insolvency Flow-base insolvency occurs when the firms cash flows are insufficient to cover contractually required payments. Contractual obligations Insolvency $ Firm cash flow Cash flow shortfall time
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Corporate Finance Lecture Note 8 9 Firm Responses to Financial Distress
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Corporate Finance Lecture Note 8 10 What Happens in Financial Distress? Financial distress does not usually result in the firm’s death. Firms deal with distress by: Selling major assets. Merging with another firm. Reducing capital spending and research and development. Issuing new securities. Negotiating with banks and other creditors. Exchanging debt for equity. Filing for bankruptcy.
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Corporate Finance Lecture Note 8 11 Responses to Financial Distress Think of the two sides of the balance sheet. Asset Restructuring: Selling major assets Merging with another firm Financial Restructuring: Issuing new securities Negotiating with banks and other creditors Exchanging debt for equity Filing for bankruptcy Organizational Restructuring: Fire CEOs Large-scale layoffs
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Corporate Finance Lecture Note 8 12 Reorganize and emerge Merge with another firm Liquidation 83% 10% 7% What Happens in Financial Distress? Financial
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Lecture Note Eight_Tsing Hua_2009 - Lecture Note 8...

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