Question

Name and discuss the concept that describes the action of company management when an industry is...

Name and discuss the concept that describes the action of company management when an industry is unattractive and the company too weak to be sold as a going concern giving management the choice to convert as many sale-able assets as possible to cash, which is then distributed to the shareholders after all obligations are paid.

Homework Answers

Answer #1

The method which is described in the question is a liquidation method to close the business. Liquidation is a process where all the assets are sold separately buy the management and then the liabilities are paid of one by one.

Waterfall mechanism is used to determine the order of payment to be made to various creditors. Various laws are in place to determine the order of payment. Last parties to be paid are the equity holders. Mostly liquidation method results in haircut for the equity holders. And sometimes nothing can be recovered by equity holders. It is the last resort for closing the business as it takes a hell lot of efforts plus maximum haircut for the owners.

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