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BAC 819 :Financial Analysis: Financial Distress Notes

Institution: Kenyatta University

Course: Master of Business Administration

Content Category: Lecture Notes

Posted By: Kipkiruikagawa

Document Type: PDF

Number of Pages: 22

Price: KES 200
 
    

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Summary

Financial Distress Notes

• Financial distress is a term in corporate finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty.
• A situation where a firm’s operating cash flows are not sufficient to satisfy current obligations and the firm is forced to take corrective action.
• If financial distress cannot be relieved, it can lead to bankruptcy.

Cost of financial distress
• Direct costs
• A common example of a cost of financial distress are bankruptcy costs.
• These direct costs include auditors' fees, legal fees, management fees and other payments.
• Indirect costs
• Cost of financial distress can occur even if bankruptcy is avoided
• Financial distress in companies requires management attention and might lead to reduced attention on the operations of the company.
• Another source of indirect costs of financial distress are higher costs of capital as usually banks increase the interest rates if a state of financial distressed occurs.
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