Pros And Cons Of Bankruptcy And Bankruptcy

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COSTS OF BANKRUPTCY, INCLUDING DIRECT AND INDIRECT Besides taxes, other main additional factor determining capital structure is bankruptcy. The mere possibility of bankruptcy however, would not make debt less attractive. A company is an entity that attracts resources from investors, uses them and generates returns to investors according to certain agreed rules. Bankruptcy is simply a recognition that the promised payments to debt-holders are greater than the value of all the assets. Since equity-holders are residual claimants, at this point, their claims are worth zero. Hence, control of the assets passes to the debt-holders, who now become the new equity-holders. The fact of bankruptcy does not change the value of the company. Just before…show more content…
There are 2 types of bankruptcy: i. Involving liquidation of the company and repayment of debt-holders. A Trustee is appointed to oversee the liquidation of the company’s assets through an auction. The proceeds from the liquidation are then used to pay the company’s creditors, and the company ceases to exist. ii. Which is more common, involving financial reorganization of the company. All pending collection attempts are automatically suspended, and the company’s existing management is given the opportunity to propose a reorganization plan. While developing the plan, management continues to operate the business as usual.  The reorganization plan specifies the treatment of each creditor of the company in which: o Creditors may receive cash payments and/or new debt or equity securities of the company. o The value of the cash and securities is typically less than the amount each creditor is owed, but more than the creditors would receive if the company were shut down immediately and liquidated. o The creditors must vote to accept the plan, and it must be approved by the Court. o If an acceptable plan is not put forth, the Court may ultimately force a

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