Halley 1 Financial Distress: Bankruptcy Financial distress which results in bankruptcy are very common for businesses in today’s economy. According to CNN Money Fortune 500, “Last year marked the highest number of billon-dollar bankruptcies ever recorded. And corporate bankruptcies have continued at an elevated clip, with about twice the number of businesses filing for bankruptcies filing for bankruptcy protection in the 12 months ending June 2010, as they did during the same span of time in 2008, 2007, or 2006.” (Roane, 2010) It is very important for every financial manager to acknowledge that bankruptcy can be a reality for any company and financial managers have to know how to prevent it. Most all companies have debts and these debts are used for financial leverage, but they have to be closely monitored by the financial manager. Many monthly debts that companies are faced with are, making monthly payments to vendors, and paying employees. It is the financial managers to manage and monitor these debts, so that the debts don’t become more than the equity. (Ross, Westerfield, & Jordan, 2010) Companies will be considered in financial distress when all of their liquidity has to be used to pay their outstanding debt. Companies can file bankruptcy to deal with and manage the lack of liquidity. When a company files bankruptcy the company is protected and bondholder or creditors cannot sue them for money that is owed. According to the authors of Fundamentals of Corporate Finance, “In principal a firm becomes bankrupt when the value of its assets equals the value of its debt.” (Ross... ... middle of paper ... ...s trying to compete with Wal-Mart and Target on similar name brands, and prices, which became detrimental to Kmart. (CNN Money.com, 2002) According to CNNMoney.com Kmart filing included “Kmart, which has about $37 billion in annual revenue, said it had secured $2 billion in debtor financing to pay its $1.6 billion in debt and expected to emerge from bankruptcy in about a year.” (2002) Kmart wanted to emerge from restructuring with a new image that was totally different form their competitors and by filing bankruptcy and reorganizing their organizations they were able to do that. Conclusion: In order for a company to prevent any type of bankruptcy a company will need to keep its assets lower than his debt. It is important for financial managers of a company to manage a company’s debt-equity ratios while still increasing leverage within the company.
Over one hundred years ago, an entrepreneur named Sebastian Spering Kresge opens his first retail store in 1899. The store was named Five-and-Dime and was located in downtown Detroit. The store was named Five-and-Dime because everything in the store was priced at either five cents or ten cents. This low price gained him a lot of customers and a lot of publicity. With this new found publicity, in 1912, he opened 85 more stores with annual sales of $10 million. As time went on, the prices have changed to $1 or less, but the business philosophy has remained the same. Around this time, the retail environment was getting very competitive, and the company needed to make some changes to keep up. In 1959, Kresge hired Harry B. Cunningham to become the president of the company. Under Cunningham leadership, the first Kmart store was opened in 1962 in Garden City, Michigan. In 1966, sales in 162 Kmart stores and Kresge stores topped the $1 billion mark and in 1968, the S. S. Kresge aired its first T.V. commercial. In 1976, Kresge made history by opening 271 Kmart stores in 1 year and becoming the first ever retailer to launch 17 million square feet of sales space in a single year. By 1977, nearly 95% of the S. S. Kresge sales were generated by Kmart so the company officially decided to change its name to Kmart Corporations. In 1991, Kmart opened the first supercenter in Medina, Ohio offering a full-service grocery area. In 1996, a complete redesign of Kmart was launched, changing its name to Big Kmart [or BigK] and in 1999, Kmart launch a new internet presence, named bluelight.com [now known as kmart.com]. In 2002, Kmart filed for Chapter 11 bankruptcy protection. (Corpor...
The consistent high spending of capital equipment is the first reason why one would recommend reducing the debt to equity ratio. A company with higher levels of debt is less flexible in being able to adjust to new market demands and conditions that require the company to make new products or respond to competition. Looking at the pecking order of financing, issuing new shares to fund capital investing is the last resort and a company that has high levels of debt, must move to the equity side to avoid the risk of bankruptcy. Defaulting on loans occur when increased costs or bad economic conditions lead the firm to have lower net income than the payments on loans. The risk of defaulting on loans and the direct and indirect cost related to defaulting lead firms to prefer lower levels of debt. The financial distress caused by additional leverage can lead to lower cash flows available to all investors, lower than if the firm was financed by equity only. Additionally, the high debt ratio that Du Pont incurred also led to them dropping from a AAA bond rating to a AA bond Rating. Although the likelihood of not being able to acquire loans would be minimal, there are increased interest costs with having a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher (AAA) bond rating.
When comparing the debt-to-assets ratio of McDonalds and Wendys, you have to divide the firms total liabilities by their total assets. Essentially, the debt-to-assets ratio is the primary indicator of the firms debt management. As the ratio increases or decreases, it indicates the firms changing reliance on borrowed resources. The lower the ratio the more efficient the firm will be able to liquidate its assets if operations were discontinued, and debts needed to be collected. In 2005 Wendy's had $2,076,043 worth in total assets and $846,264 in total liabilities. When divided, Wendys has the lower ratio of the two competitors at 40%. This means that they would take losses of 40% if operations were shut down, and the cash received from valuable assets would still be sufficient to pay off the entire debt. It also means that 40% of Wendys assets are made through debt. McDonalds in 2005 had $12,545.3 (in millions) of total liabilities and $22,534.5 (in millions) of total assets. After doing the math, McDonalds ends up with a ratio of 56% which is higher than Wendys by sixteen percent. This means that there is more default on McDonalds liabilities, which can be a costly event from lenders perspective. McDonalds makes 56% of all its assets through debt. In reality, its not good to have a debt-to-assets ratio over 50%. Its also not good to have a debt-to-assets ratio that is too low because...
Kmart is a huge vintage company that had peeked at one time and now is
As revealed by the SWOT analysis earlier Kmart has potential to pull itself out of its current position of facing closure. In order to exploit opportunities and counter threats Kmart needs to build on these competencies to strengthen its position and counter internal weaknesses against the single largest industry threat - increased competition in a mature market.
According to the Kohl’s Corporation Hoover Report (2014), in the late 1920s, a man named Max Kohl opened a grocery store in Milwaukee, Wisconsin (Hoover Report, 2014, pg. 9). By 1938, Max and his three sons had developed his store into a successful chain and incorporated the business. Max Kohl had experienced enough success by 1962 that he opened a department store right next to his Kohl’s grocery store. In 1972, Max Kohl and his family’s “65 food stores and five department stores were generating about $90 million in yearly sales” (pg. 9) In the same year, the British American Tobacco’s Brown & Williamson Industries (BATUS) purchased 80% of the Kohls’ two operations. Six years later, BATUS proceeded to purchase what remained of Kohl’s. In the early 1980s, BATUS decided that “Kohl’s discount image did not fit in with BATUS’s other retail operations” and decided to ultimately separate the two operations in order to put them up for sale (pg. 9). The president and chief executive officer at the time, William Kellogg, “and two other executives, with the backing of mall developers Herbert and Melvin Simon, led an LBO (leveraged buy-out) to acquire the chain’s 40 stores and a distribution center” (pg. 9). By the time Kohl’s managed to go public in the year 1992, they “had 81 stores in six states, and sales topped $1 billion” (pg. 9). At this time Kohl’s began its expansion and within the next five years managed to top sales at two billion dollars. Kohl’s then “acquired a former Bradlees store to enter New Jersey and opened stores in Washington, DC; Philadelphia; New York; and Delaware” (pg. 9). The following year Kohl’s managed to expand into Tennessee by adding new stores. The company named Larry Montgomery CEO in 1999 and short...
On January 22, 2002, Kmart filed for Chapter 11 bankruptcy protection becoming the largest retailer ever to do so in U.S. history. Most industry analysts attributed the immediate cause of the company's bankruptcy filing to a dull holiday season and stiff competition from WalMart and Target as the chain's more fundamental problem. But competition wasn't the root cause of Kmart's consistently poor performance. The real reason for Kmart's poor performance is that Kmart never had a marketing strategy. Kmart completely misunderstood its market and was positioning itself in the wrong direction.
Bankruptcy, today, is a very common thing among companies and individuals alike. Sadly enough there were as many bankruptcy cases filed in federal courts, as there were all other cases. The American bankruptcy law allows people to avoid paying their debts, by offering the debtors a discharge, which eliminates all their legal responsibilities. However, bankruptcy is a controversial issue amongst religious members of the Jewish population, for one must question whether it is morally correct to avoid paying a dept by filing for bankruptcy. According to the torah, a debt is an obligation that must be fulfilled. Consequently, if a bankruptcy discharge is invoked, under the strictness of Jewish law, one is still required to pay back the money no matter how long it may take him. According to Bais Din the debtor must hand over his property, with a few exclusions, to the creditor, and if this does not cover what he owes the creditor, then every time the debtor acquires new assets, he pays the creditor until he no longer owes him anything.
Their chapter 11 petition was filed in the federal court in Manhattan, New York and “according to GM 's bankruptcy filing, the company has assets of $82.3 billion, and liabilities of $172.81 billion. That would make GM the fourth largest U.S. bankruptcy on record, according to Bankruptcydata.com” (CNN Money). Just to put into prospective how gargantuan this company was at the time, “until 2008, when it was overtaken by Toyota, GM was the world 's biggest carmaker, producing well over 9m cars and trucks a year in 34 different countries. It has 463 subsidiaries and employs 234,500 people, 91,000 of them in America, where it also provides health-care and pension benefits for 493,000 retired workers. In America alone, it spends $50 billion a year buying parts and services from a network of 11,500 vendors and pays $476m in salaries each month”(The Economist), so it is easy to understand by looking at that data that the fallout of this company failing would have been astronomical on the already depressed economy.
Overall, the main point of the merger was to help both organizations financially. Since Sears and Kmart were both facing financial deficits and significant declines, this merger was thought to bring about prosperity. However, there was no concrete strategy implemented that would ensure long-term
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.
Should Kmart and Sears keep their own identities and have unique competitive strategies, or should they be combined in some way with a new overall corporate competitive strategy? Please defend your answer.
Most critical to this discussion is a clear understanding of what a financial manager is and does and how his or her role aids in helping to establish the valuation of a corporate entity in today's global financial market. Quite simply, a financial manager helps to measure a company's market value and its risk while also helping to systematically reduce its costs and the time necessary to make informed decisions regarding objective driven operations. This is quite a demanding game plan for an individual and most often financial managers, in the corporate world, work in cooperation with a team of financial experts. Each member of that team perhaps having expertise in differing areas of activity, but each however, being no less expert in his or her respective area of endeavors in behalf of the corporation. The team is assembled under the direction of the officer know in the corporation as the Chief Financial Officer who today is becoming increasingly indispensable to the CEO who directs a modern model of action driven, bottom-line oriented corporate activity (Couto, Neilson, 2004). One can accurately state that the role of the competent and capable financial manager is figuratively worth its weight in gold.
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
In this day and age, people and businesses are realizing that things have to be done differently. Marketing, global markets and competition itself have changed so much that companies have to be creative and adapt to any situation in order to survive in this world of globalization. Business debt consolidation is just an answer to this global situation.