The value of a ﬁrm in ﬁnancial distress is diminished if the ﬁrm:
A)is declared bankrupt and proceeds to be liquidated.
B)is declared insolvent and undergoes ﬁnancial reorganization.
C)is a partnership.
D)Both A and C.
E)Both A and B.

Question

Quizplus · Accepted Answer

When a firm is in financial distress, its value is diminished. If the firm is declared bankrupt and proceeds to be liquidated, all assets are sold off to pay off creditors, and there is little to no value left for the shareholders. On the other hand, if the firm is declared insolvent and undergoes financial reorganization, there is a chance that the firm can restructure its debt and operations to become profitable again, thus preserving some value for the shareholders. Partnership structures do not necessarily impact the value of the firm in financial distress. Therefore, options A and C are not the best choices. Thus, the best answer is E - both A and B.

The Value of a ﬁRm in ﬁNancial Distress Is Diminished