What informal remedies are available to firms in financial distress? In answering this question, define the following terms: (6) Assignee (trustee

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What informal remedies are available to firms in financial distress? In answering this question, define the following terms: (6) Assignee (trustee

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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 10 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 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:
(1) Workout

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 10 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 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:
(2) Restructuring

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 10 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 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:
(3) Extension

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 10 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 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:
(4) Composition

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 10 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 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:
(5) Assignment

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 10 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 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What informal remedies are available to firms in financial distress? In answering this question, define the following terms:
(6) Assignee (trustee)

Explanation & AnswerSolution by a verified expert

Explanation

Informal remedies available to firms in financial distress are informal reorganization or informal liquidation.
 
A workout is a situation of voluntary reorganization to reestablish a company's financial health with the help of the creditors. This happens when the company is fundamentally strong, but it faces a temporary cash-flow problem.

Verified Answer

Informal remedies available to firms in financial distress are informal reorganization or informal liquidation.
 
A workout is a situation of voluntary reorganization when creditors work with the firm to recover its financial health.

Explanation

During financial distress, the company can modify the amount of debt it should hold in its capital structure, which is called restructuring. This is done to re-establish the company to make it financially sound. This process includes an extension and composition of debt. In extension, the company asks creditors to postpone the dates of repayment. However, in case of composition, the company asks its creditors to reduce some of their claims or interest payments voluntarily.

Verified Answer

Restructuring is a process of modifying debt in the company's capital structure in times of financial distress. This process includes extension and composition of debt.

Explanation

In an extension procedure, the company asks its creditors to postpone their payment dates during financial distress. By postponing the dates of repayment, the company gets time to make its financials sound so that it can pay the debt payments. It is preferable by creditors as it promises full payment eventually.

Verified Answer

Extension is a type of informal restructuring where the company in financial distress asks creditors to postpone their dates of repayment.

Explanation

In composition of debt as a part of informal restructuring, the creditors voluntarily reduce their claims on the financially distressed company. The claims reduced by the creditors may include the reduced principal payments, lower interest rates on debt, accepting equity in exchange for debt, or a combination of all.

Verified Answer

The composition is a type of informal restructuring where the creditors voluntarily reduce some of their claims on the financially distressed company either by accepting lower coupon payment or by reducing the claim on the principal amount.

Explanation

In an assignment, the company decides to sell its assets to repay the creditors. The company decides to sell its assets when the firm's assets are worth more than the business' going concern value. In this process, creditors can receive more of their claims than they would in a formal bankruptcy process. The legal bankruptcy procedure involves huge costs, and the trustee has no flexibility in selling the asset, which leads to receiving less amount on selling the assets.

Verified Answer

The assignment is an informal liquidation process where the company decides to sell the firm's assets when the firm's assets are worth more than they would if the business were alive. The company chooses liquidation through assignment because it is a cheaper mode of liquidation than formal bankruptcy, which involves huge costs.

Explanation

During liquidation through assignment, the firm's assets are transferred in the name of a third party called the assignee or the trustee. The assignee is responsible for the sale of the assets through a private sale or public auction. The assignee distributes the proceeds from the sale to the creditors on a pro-rata basis. The assignee has flexibility in disposing of the assets.

Verified Answer

An assignee or a trustee is a third party who receives the title of the company’s assets at liquidation through the assignment. An assignee is responsible for the sale of the company’s assets and distributes the proceeds to the creditors.

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