Ross5eChap31sm - Chapter 31: Financial Distress 31.1...

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Chapter 31: Financial Distress 31.1 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. 31.2 There are four possible reasons why firms may choose legal bankruptcy over private workout. i. It may be less expensive (although legal bankruptcy is usually more expensive). ii. Equity investors can use legal bankruptcy to “hold out”. iii. A complicated capital structure makes private workouts more difficult. iv. Conflicts of interest between creditors, equity investors and management can make private workouts impossible. 31.3 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. 31.4 Under the Canadian Bankruptcy and Insolvency Act you should propose.
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Ross5eChap31sm - Chapter 31: Financial Distress 31.1...

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