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Various Finance Discussions

Discussion 1
- What are some of the criticisms or problems associated with the bankruptcy system? Are these criticisms valid? Why or why not? Are there any responses or solutions to address these criticisms?
- What are the advantages of a company's formal reorganization under Chapter 11?
- Why do creditors usually accept a plan for financial rehabilitation rather than demand liquidation of a business?
- Under what scenario might a liquidation be a better option than reorganization or rehabilitation? Why?

Discussion 2
- A friend asks whether he should open a savings account that pays 5 percent interest compounded semiannually or one that pays 5 percent interest compounded daily? What would you tell him or her, and why? and explain the role that the time value of money plays.
- If each of the positions below, if you were required to choose two major financial tools to focus on and become expert at, which would you choose? Why? Support your answers by providing at least one example of why your chosen tools are important for each position; rank the tools in order of importance to the job requirements.
o Financial planner
o Financial analyst
o Portfolio manager
- How is the time value of money relevant to retirement planning? Discuss the TVM in terms that a non-financially savvy couple in their mid-forties could understand.

Discussion 3
- In your own words explain what fund capital is. How does it differ from equity capital?
o Why would a not-for-profit be concerned with managing fund capital?
o What role would a financial manager play in working with fund capital? Explain, giving at least two specific examples.
- Describe the net present social value model for making capital budgeting decisions. Giving at least one specific example, explain how social value might be measured.
- What role does the NPV model play in not-for-profit management? and give examples.

Solution Preview

Discussion 1

Based on numerous articles I've read about the bankruptcy system, particularly during the recent financial crisis, one of the 'loudest' criticism about the system is that entities filing for bankruptcy could be bankrupt in paper only, but in reality are not. Also, the bankruptcy system encourages debtors to borrow and spend money without the usual due diligence since at the end of the day, the bankruptcy system affords this debtor a last resort option when everything, the debtor's investment scheme fails.

Yes, these criticisms are valid. For example, in a way, the bankruptcy system invalidates several tenets of lending and borrowing such as the concept of collateral. When a creditor lends money to a debtor and the debtor assigns properties as the collateral, and subsequently the debtor files for bankruptcy protection, then the safeguard afforded by the collateral no longer as effective as before. Because of the bankruptcy system, the creditor's ability to collect on the collateral may be delayed or worse, neutralized completely. This can lead to irresponsible investment and management behavior by the debtor in handling his or her businesses.

Fortunately, the 109th Congress have acknowledged the validity of the criticisms against the bankruptcy system by enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This law makes it more difficult to file for bankruptcy to explicitly prevent abuse of the system.

Whenever a company files for Chapter 11, it gains the following abilities:

1. It can restructure its unsecured debt, which are the debts without collateral. Restructuring unsecured debt means the Chapter 11 filer is not required by law to pay 100% of this debt. As a matter of fact, the law gives it license to pay only a fraction of the debt.
2. If the company operates in several geographic locations, Chapter 11 allows the company to close unprofitable locations while operating the rest.
3. If the company has a large tax debt to the IRS, then Chapter 11 allows the company to restructure its payment option for this debt. Though no tax debt is ...

Solution Summary

1418 words discussing the time value of money and fund capital.