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Financial Distress PDF

Financial distress refers to a condition where a company is struggling or unable to meet its financial obligations. It can occur when promises made to creditors are broken or difficult to fulfill, and if left unaddressed, may lead to bankruptcy. Financial distress imposes costs on a company such as bankruptcy fees, higher borrowing costs, and management distraction from core operations. Companies can relieve financial distress through debt restructuring if debt is the issue, or by negotiating payment delays with creditors and improving operations if operational problems are the cause.

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209 views2 pages

Financial Distress PDF

Financial distress refers to a condition where a company is struggling or unable to meet its financial obligations. It can occur when promises made to creditors are broken or difficult to fulfill, and if left unaddressed, may lead to bankruptcy. Financial distress imposes costs on a company such as bankruptcy fees, higher borrowing costs, and management distraction from core operations. Companies can relieve financial distress through debt restructuring if debt is the issue, or by negotiating payment delays with creditors and improving operations if operational problems are the cause.

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kbalaputra
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Financial distress

Financial distress is a term in corporate nance used


to indicate a condition when promises to creditors of a
company are broken or honored with diculty. If nan-
cial distress cannot be relieved, it can lead to bankruptcy.
Financial distress is usually associated with some costs to
the company; these are known as costs of nancial dis-
tress.
1 Cost of nancial distress
A common example of a cost of nancial distress are
bankruptcy costs. These direct costs include auditors
fees, legal fees, management fees and other payments.
Cost of nancial distress can occur even if bankruptcy
is avoided (indirect costs).
Financial distress in companies requires management at-
tention and might lead to reduced attention on the opera-
tions of the company.
Another source of indirect costs of nancial distress are
higher costs of capital as usually banks increase the inter-
est rates if a state of nancial distressed occurs.
2 Options for relieving nancial
distress
If high debt burden is the cause of nancial distress, the
company can undergo a debt restructuring. If operational
issues are the reason for the distress, the company can ne-
gotiate a payment holiday with its creditors and improve
operations to be again able to service its debt.a
3 External links
Indicators and Sources of Financial Distress
Predicting Financial Distress of Companies: Revisit-
ing the Z-Score and Zeta Models by Edward Altman
Financial Distress, Bankruptcy Law, and the Busi-
ness Cycle by Javier Suarez and Oren Sussman
The Costs of Financial Distress across Industries by
Arthur Korteweg
Insolvency Service website
Probability of bankruptcy screener for public com-
panies based on Altman Z Score
1
2 4 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES
4 Text and image sources, contributors, and licenses
4.1 Text
Financial distress Source: http://en.wikipedia.org/wiki/Financial_distress?oldid=600909565 Contributors: Chowbok, Sj, Ghoshsanjoy,
Allens, SmackBot, Ohnoitsjamie, Civil Engineer III, MatthewMain, Cydebot, Naniwako, Seraphim, Lamro, HoulihanLokey, ClueBot,
Addbot, Dwgabbard, Whitepearl543, 8ung3st, Techdoctor, Xqbot, Jaeljojo, Helpful Pixie Bot, Juhuyuta and Anonymous: 19
4.2 Images
File:Symbol_list_class.svg Source: http://upload.wikimedia.org/wikipedia/en/d/db/Symbol_list_class.svg License: ? Contributors: ?
Original artist: ?
File:Wall_Street_Sign_NYC.jpg Source: http://upload.wikimedia.org/wikipedia/commons/6/65/Wall_Street_Sign_NYC.jpg License:
CC-BY-SA-3.0 Contributors: Own work Original artist: JSquish
4.3 Content license
Creative Commons Attribution-Share Alike 3.0

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