Chapter 16 Flashcards
Default
when a firm fails to pay the required interest or principal payments
Liquidation
is when a trustee is put in place to oversee the bankruptcy process and make sure that assets are sold through auction
Reorganization
this is for larger companies. They are given the opportunity to propose a reorganization of the company
Bankruptcy code is designed to
provide an efficient process
Workout
To avoid the heavy costs of bankruptcy, firms may first try to negotiate with its creditors
reorganization plan
A firm first develops a reorganization plan with its creditors and then files chapter 11 bankruptcy to begin the plan
Indirect Costs of Financial Distress
Loss of customers Loss of suppliers Loss of employees Loss of Receivables Fire Sales of Assets Inefficient Liquidation Costs to Creditors
When reviewing the overall impact of indirect costs, you should take the following into account
- Identify losses to total firm value (and not just losses to equity and debt holders)
- Identify the incremental losses that are associated with financial distress
Trade-off Theory
weighs the benefits of debts
Goal incongruence
when the manager (CEO) and the equity holder have different goals (there becomes a conflict). The equity holder becomes frustrated.
Management entrenchment
when the CEO is protected from the equity holder. Also called Empire Building
Threat of takeover
not related to capital management, but it is a threat. Takeover defences are designed to reduce takeover threat.
Financial Pecking Order
the order is 1. Retained earnings (no signal); 2. Debt issue (small negative signal or could be a positive tax shield signal); 3. Share issue (large negative signal)
Signalling theory
Share repurchase
Share issue
financial discipline
The ability for the shareholder to force the CEO to make certain decisions (an agency benefit - checks and balance)
