Bankruptcy, Reorganization, and Liquidation
Kimberly MacKenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of
women's casual clothing, is worried.
Her firm has been selling clothes to Russ Brothers
department store for more than ten years, and she has never experienced any problems in
collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim's
Clothes $65,000 for spring sportswear that was delivered to the store just two weeks ago.
Kim's concern was brought about by an article that appeared in yesterday's
that indicated that Russ Brothers was having serious financial problems.
Further, the article stated that Russ Brothers' management was considering filing for
reorganization, or even liquidation, with a federal bankruptcy court.
Kim's immediate concern was whether or not her firm would collect its receivables if
Russ Brothers went bankrupt.
In pondering the situation, Kim also realized that she
knew nothing about the process that firms go through when they encounter severe
To learn more about bankruptcy, reorganization, and liquidation, Kim
asked Ron Mitchell, the firm's chief financial officer, to prepare a briefing on the subject
for the entire board of directors.
In turn, Ron asked you, a newly hired financial
analyst, to do the groundwork for the briefing by answering the following questions:
What are the major causes of business failure?
The major causes of business failure consist of economic factors, such as industry
weakness and poor location, and financial factors, such as too much debt and
However, most business failures occur because a number of
factors combine to make the business unsustainable.
Do business failures occur evenly over time?
A fairly large number of businesses fail each year, but the number in any one year
has never been a large percentage of the total business population.
The failure rate of
businesses, however, has tended to fluctuate with the state of the economy.
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