Chapter 16 Flashcards Preview

Corporate Finance Management > Chapter 16 > Flashcards

Flashcards in Chapter 16 Deck (15)
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1
Q

Default

A

when a firm fails to pay the required interest or principal payments

2
Q

Liquidation

A

is when a trustee is put in place to oversee the bankruptcy process and make sure that assets are sold through auction

3
Q

Reorganization

A

this is for larger companies. They are given the opportunity to propose a reorganization of the company

4
Q

Bankruptcy code is designed to

A

provide an efficient process

5
Q

Workout

A

To avoid the heavy costs of bankruptcy, firms may first try to negotiate with its creditors

6
Q

reorganization plan

A

A firm first develops a reorganization plan with its creditors and then files chapter 11 bankruptcy to begin the plan

7
Q

Indirect Costs of Financial Distress

A
Loss of customers
Loss of suppliers
Loss of employees
Loss of Receivables
Fire Sales of Assets
Inefficient Liquidation
Costs to Creditors
8
Q

When reviewing the overall impact of indirect costs, you should take the following into account

A
  1. Identify losses to total firm value (and not just losses to equity and debt holders)
  2. Identify the incremental losses that are associated with financial distress
9
Q

Trade-off Theory

A

weighs the benefits of debts

10
Q

Goal incongruence

A

when the manager (CEO) and the equity holder have different goals (there becomes a conflict). The equity holder becomes frustrated.

11
Q

Management entrenchment

A

when the CEO is protected from the equity holder. Also called Empire Building

12
Q

Threat of takeover

A

not related to capital management, but it is a threat. Takeover defences are designed to reduce takeover threat.

13
Q

Financial Pecking Order

A

the order is 1. Retained earnings (no signal); 2. Debt issue (small negative signal or could be a positive tax shield signal); 3. Share issue (large negative signal)

14
Q

Signalling theory

A

Share repurchase

Share issue

15
Q

financial discipline

A

The ability for the shareholder to force the CEO to make certain decisions (an agency benefit - checks and balance)