FIN 525 – Spring 2014
Formal corporate bankruptcy proceedings generally take on two distinct forms: Chapter 7 (liquidation) and Chapter 11 (reorganization). Under Chapter 7 liquidation, the firm is shut down by a court-appointed trustee, and the firm’s assets are liquidated and the proceeds distributed in accordance with the absolute priority rule. Chapter 7 is also referred to as a “cash auction” procedure. In Chapter 11, an organization remains in control of its business operations (known as a ‘going-concern’), but is subject to the oversight of the bankruptcy courts.
Corporate bankruptcy is an important issue for investors, debt holders, and managers. The implications of bankruptcy proceedings can have a tremendous impact on economic outcomes; thus, it is vital for all parties to be versed in the framework and procedure of a bankruptcy. This study will attempt to address several issues, such as the costs of bankruptcy between Chapter 7 and Chapter 11, the risks undertaken in proceedings (looking primarily at APR violations), and conflicts of interest amongst the aforementioned agents of a bankruptcy proceeding. Initially, a historical summary of U.S. bankruptcy laws will be undertaken, as bankruptcy code has been reformed quite frequently.
Corporate bankruptcy is an important issue for investors, debt holders, and managers. The implications of bankruptcy proceedings can have a tremendous impact on economic outcomes; thus, it is vital for all parties to be versed in the framework and procedure of a bankruptcy. This study will attempt to address several issues, such as the costs of bankruptcy between Chapter 7 and Chapter 11, the risks undertaken in proceedings (looking primarily at APR violations), and conflicts of i...
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...s of bankruptcy are lower. Furthermore, they found that APR violations tended to increase interest rates and make credit rationing more likely to occur, thereby limiting the firm’s capital ventures.
Conclusion
Empirical research suggests that the bankruptcy procedure in itself dramatically favors equity holders over creditors, particularly during a reorganization process. Additional legislation may be needed to ensure both fairness and economically efficient outcomes. Much of this is also due to disparate incentives, both natural and those inherent in bankruptcy process itself, among relevant parties along the APR scale. The costs of Chapter 11 versus Chapter 7 have been historically been mixed, although there is robust empirical evidence showing that, when self-selection is accounted for, Chapter 11 firms are less costly and more adept at retaining firm value.
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
UST Inc. is a dominant player in the smokeless tobacco industry. We have been tasked with weighing the cost and benefits of having leverage in their capital structure and to advise the CEO whether or not to go ahead with the recapitalization. After solving for UST’s credit ratings and value given three different stock buyback scenarios, $700 million, $1 billion, and $1.5 billion, we would suggest that UST move forward with the recap at $1 billion.
...ge. On top of that, a sudden increase in credit portrays you as a much higher risk than someone who has steadily built up accounts and credit as needed.
damaged credit, the companies are taking a financial risk by financing them. Considering that for
Timeline of this case should be clearly organized in order to better understanding this case. In 2009, Poor Son transferred Rich Grandson to Parent. In 2010, Poor Son filed a voluntary petition for reorganization under Chapter 11 of the US bankruptcy code, and Parent deconsolidated Poor Son from statements. In 2011, Poor Son filed an action against Parent seeking to void the transfer of Rich Grandson. In May 2012, the bankruptcy court held a selection meeting in which it considered competing plans of reorganization submitted by four bidders. In June 2012, OtherCo, an unrelated party, became the wining plan sponsor. In July 2012, OtherCo rescind its offer because the bad evonomic condition. In December 2014, the bankruptcy court recommended
Prior to the winding-up of an insolvent company, its creditors may individually enforce any measure available to them in order to obtain payment of the debt owed to them by such company. However, upon the opening of the winding-up proceedings these individual actions are replaced by a collective insolvency regime which attempts to ensure the rateable and equitable distribution of the assets of the insolvent company among its creditors. This distribution is known as pari passu distribution.
The implications of these findings are as follows. The works of these academics highlight the important point that there is higher volatility of capital charges for better quality credits (Goodhart & Taylor, 2004). This is because these credits face a steeper risk curve, as the movement within the ratings scale (from one rating to another) is much greater.
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Among the study’s findings were that the deciding factor of the predictor of bankruptcy should not be only a few ratios, as the measure of a company’s financial solvency may differ as the firm’s situations differ. The important question is to which ratios are to be used and of those ratios chosen, which ratios are given priority weight.
People should always try to avoid breaking a contract or filing bankruptcy if they can. Before you sign any contract you should always read very carefully or you could end up signing your life away. There are many rules when filing bankruptcy that could end up ruining your credit history and credit chance in the future. Could bankruptcy help you out of a business contract? Contracts are made every day and there are many parts of a contract.
...g to firms misconduct. The bankruptcy of Enron exposed the matter of lack of independence with the Board and the failure of the independent system in the USA which needed to be reformed; however to maintain such independence can be tricky.
Barra Airways has an interest coverage ratio (ICR) of 18; this means that Barra Airways is not burdened with a large amount of interest payments on existing debts. Therefore, using debt does appear to be an attractive source of finance. This is because Barra Airways existing interest burden is low, meaning that to increase it would have a reduced effect on the company’s net profit. However, EasyJet has an ICR of 30.88, considerably larger than that of Barra Airways [5]. Lenders may look at this data and conclude that Barra Airways is a riskier company to lend too than others in the same industry; this will result in a higher interest rate on any debt taken out.
Chapter 7 and Chapter 13 bankruptcies are full of advantages and disadvantages. But at the same time they are very different. Without knowing these differences a person could lose many things from money to possessions.
A creditor who is not a party to the bankruptcy proceedings, but who has an interest in the proceedings, may file an ex parte application with the bankruptcy court. An insolvent debtor may file a debtor’s petition for voluntary bankruptcy. The insolvent debtor must provide to the court a summary of the debts and assets. An agreement between a debtor and creditor that the amount stated as being owed to the creditor is accurate is an account statement. However, an account that is open and unsettled is an account that is current.