What five major issues must be addressed when a firm faces financial distress?

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What five major issues must be addressed when a firm faces financial distress?

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What five major issues must be addressed when a firm faces financial distress?

Explanation & AnswerSolution by a verified expert

Explanation

During the time of financial distress, following five issues must be addressed by a company:

Is the inability of debt payment a temporary cash-flow problem or a permanent problem? A permanent problem may be caused by a decline in asset values below debt obligations.
If it is a temporary problem, then the company can ask for some time from the creditors to recover back to its actual financial health. If there is a long-term loss where asset values have declined and economic losses have occurred, then the parties bearing the losses and parties receiving their claims must be decided.
The company's worth in selling off its assets and in continued operations must be estimated. If the company is worth more by selling its assets than its continued operations, then the assets are disposed of, and proceeds are used to repay the debt obligations.
Should the company use informal liquidation procedures for reorganization or file for protection under chapter 11 of the Bankruptcy Act must be decided.
Who should control the firm during liquidation or reorganization? Should a trustee be hired, or existing management left in charge of the procedures?All these decisions should be made.

Verified Answer

During financial distress, following five issues needs to be addressed:

 The inability of a company to make debt payment is a temporary or a permanent problem?
If it is a temporary problem, the company may ask the  creditors to let it recover back to its actual financial health. If there is a long-term loss, then who will bear the losses must be decided.
Whether it is better to keep the company operational or liquidate must be determined.
The mode of liquidation or reorganisation must be decided.
Who should manage the firm at the time of liquidation or reorganisation must be decided.

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