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FIN 620-session11 agenda

FIN 620-session11 agenda - FIN 620 Capital Markets...

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FIN 620 Capital Markets, Institutions, and Long-Term Financial Management Session 11 Agenda 1. Lecture Notes/Comments 2. Power points 3. Self Study Materials 4. Homework 5. Class Discussion 1. Lecture Notes/Comments RWJ, Chapter 30 What Is Financial Distress? The text defines financial distress as: "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." The most important point is that the firm is forced to take actions that it would not otherwise choose. Insolvency : - Stock-based insolvency occurs when the value of assets is less than the value of promised payments to debt. - Flow-based insolvency occurs when operating cash flows are insufficient to cover contractually required payments. What Happens in Financial Distress? Financial distress can serve as the firm's "early warning" signal. Ironically, firms with high financial leverage often face financial distress earlier and, therefore, have more time to reorganize. Firms with low leverage may not recognize they are in distress until too late. A firm can respond to financial distress by increasing available cash flows (asset restructuring) or by reducing liabilities (financial restructuring). Low leverage firms have very limited options in financial restructuring, and, due to delay in their response, the asset values have often deteriorated. For these reasons, firms with low financial leverage are more likely to liquidate than firms with high leverage.
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Means to overcome financial distress include: Asset Restructuring by selling major assets: - Merging with another firm; -Reducing capital spending and
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