Financial Distress: Bankruptcy Essay -- Economy, CNN Money, Kmart

Halley 1 Financial Distress: Bankruptcy Financial distress which results in bankruptcy are very common for businesses in today’s economy. According to CNN Money Fortune 500, â€Å"Last year marked the highest number of billon-dollar bankruptcies ever recorded. And corporate bankruptcies have continued at an elevated clip, with about twice the number of businesses filing for bankruptcies filing for bankruptcy protection in the 12 months ending June 2010, as they did during the same span of time in 2008, 2007, or 2006.† (Roane, 2010) It is very important for every financial manager to acknowledge that bankruptcy can be a reality for any company and financial managers have to know how to prevent it. Most all companies have debts and these debts are used for financial leverage, but they have to be closely monitored by the financial manager. Many monthly debts that companies are faced with are, making monthly payments to vendors, and paying employees. It is the financial managers to manage and monitor th ese debts, so that the debts don’t become more than the equity. (Ross, Westerfield, & Jordan, 2010) Companies will be considered in financial distress when all of their liquidity has to be used to pay their outstanding debt. Companies can file bankruptcy to deal with and manage the lack of liquidity. When a company files bankruptcy the company is protected and bondholder or creditors cannot sue them for money that is owed. According to the authors of Fundamentals of Corporate Finance, â€Å"In principal a firm becomes bankrupt when the value of its assets equals the value of its debt.† (Ross... ...s trying to compete with Wal-Mart and Target on similar name brands, and prices, which became detrimental to Kmart. (CNN Money.com, 2002) According to CNNMoney.com Kmart filing included â€Å"Kmart, which has about $37 billion in annual revenue, said it had secured $2 billion in debtor financing to pay its $1.6 billion in debt and expected to emerge from bankruptcy in about a year.† (2002) Kmart wanted to emerge from restructuring with a new image that was totally different form their competitors and by filing bankruptcy and reorganizing their organizations they were able to do that. Conclusion: In order for a company to prevent any type of bankruptcy a company will need to keep its assets lower than his debt. It is important for financial managers of a company to manage a company’s debt-equity ratios while still increasing leverage within the company.