Question

1. Financial distress:
   1. What are the costs of going bankrupt?   Explain briefly.
   2. “A company can incur costs of financial distress without ever going bankrupt.” Explain how this can happen

Answer 1

Answer a :

Cost of going bankrupt are, Direct cost are legal fees, auditor fees and administrative costs of bankruptcy.

And Indirect Costs are delays in liquidation or operating decision while bankruptcy is resolved or poor investment.

Answer b :

When company use lot of debt, then cost of financial distress may occur. Comp ay can incur cost of financial distress even without going bankrupt. Some time these cost exceed the cost of bankruptcy. Cost include opportunity profit lost due to cut in Investment, R&D and marketing cost. These cost also include lost of customer as less customer want to deal with due to their fear that whether the company will able to provide future service. And also supplier unwilling to extend flexible credit period. Conflicts of interest between owner,s supplier &managers will arise when co. gets into financial distress.